Don't Just Chase the Big Spenders

In just about every seminar which we conduct, we encourage our clients to identify and focus on the 20 percent of customers who account for 80 percent of profits. The logic is that if you focus on the profitable customers, and dump the worst of the rest, your business will be better off. I’ve even heard people talking about “firing the customers who are too small to be worthwhile.”

Two recent trends have led to the current situation. The first has been the growing desire of companies to create one-to-one relationships with all of their customers, including those in the “long tail”, and getting to know them as individuals, and moving away from the mass-marketing approach. “Mass-customisation” and “personalization” are some of the current buzzwords used to describe the continual specialization and market niche-ing movement.

The second trend has, of course, been the ability to use information technology to gather, store and analyse much more information about customers, and to use this data to service even the smallest customers.

Now the strategy of pursuing only the “best” customers may have made a lot of sense for many businesses in the past. Some airlines, like SAS and British Airways successfully chose to focus only on business executives, and even cut the space allocated to those annoying, wretched people who occupied the cheap seats at the back. Many banks, in response to the competitive crisis in which they find themselves, have appointed special staff to look after their prestige high-net-worth clients, and have gone so far as to punish, (with obscenely high service fees,) the little people who bother the counter staff. Various frequent buyer programmes reward customers who purchase products and services in large quantities. In these days of increased competition and mercenary customers, not many businesses can afford to ignore the small spenders.

There are not many companies that refuse to serve smaller and less profitable customers today, but some businesses use subtle and not-so-subtle tactics to reduce the cost to serve customers. For example, most call centres will encourage staff to get off the lines and onto the next call as soon as possible, and, indeed, measure and reward members of staff who are efficient at this. “Special” customers are given various options such as specific “secret” numbers to call, specific people to talk to, and all sorts of “freebies”. Better customers get better terms, such as when banks and credit card companies give better interest rates for those who are in bigger debt.

Infamously, electricity supplier ESKOM negotiated superbly cheap rates for large consumers of electricity such as smelters and mines, whilst millions of small consumers were forced to pay harsh rates. The utility now struggles to find the money to build desperately needed new power stations.

Nobody will argue that these are good, logical short-term marketing tactics for companies which want to encourage customers to buy more. However, consider that there may be some longer term flaws and traps in this strategy.

First, as a company sheds its less profitable customers, its fixed costs do not go away overnight, and thus they have to be spread over a smaller number of customers. Thus, many of the better customers now become unprofitable too, so they also have to be fired, and so on until there are no customers left.

Second, in any industry, (such as banking,) there are a limited number of very profitable customers, all being chased by the same competitors. All companies target these same customers, with equal marketing vigour, and eventually end up paying more on marketing and retention than they would with the plodders.

Third, and this is the most compelling weakness of the 80:20 strategy, there will always be some smaller, hungrier, more efficient competitor who is more than willing to service the large chunk of customers who now start to feel neglected. In the airline industry Richard Branson of Virgin Atlantic, and Herb Kelleher of Southwest Airlines, have shown that they can streamline their services, make them more cost-efficient, and still look after the unwanted and neglected customers better than the bigger companies. Capitec have done the same with customers in the banking industry, and the tiny Boland Bank even opened beyond normal working hours until the big four threatened them.

Finally, small customers often become big customers, and if you lose them early on, they will establish better business relationships with other companies.

The small guys, it seems, may still teach the large corporations a lesson.

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