The 80/20 Rule in Marketing: Are 20% of Your Customers Really Driving Your Business?
Questions Your Marketing Data Should Answer
You probably know who your biggest customers are, but do you know how much of your business they actually represent? The 80/20 rule, also known as the Pareto Principle, suggests that a relatively small portion of inputs often produces a disproportionately large share of results. In business, that idea is frequently translated to: 20% of your customers generate 80% of your business. But the 80/20 rule in marketing isn’t really about hitting those exact percentages. It’s about understanding whether a relatively small group of customers is creating a disproportionate amount of value for your business. If so, does your marketing strategy reflect that?
If 20% of your customers are driving most of your business, treating every customer equally may mean you’re investing your marketing dollars in the wrong places.
Question 1: How much of your revenue comes from your best customers?
If you rank your customers from highest to lowest based on revenue, what happens when you look at the top 20%? Do they represent 40% of your revenue? 60%? 80%? More?
You may discover that your customer base is far more concentrated than you realized. If you are only looking at the total number of customers, you might be viewing an incomplete picture of your business.
For example, imagine two companies that each have 10,000 customers. One generates relatively consistent revenue across its entire customer base. The other generates the majority of its revenue from 2,000 customers.
Those businesses may have the same number of customers, but they have very different marketing challenges and should have different strategies to address them.
Question 2: Are your biggest customers actually your best customers?
Revenue is an obvious place to start, but it shouldn’t necessarily be where the analysis ends. A customer who makes one enormous purchase isn’t automatically more valuable than someone who has purchased consistently for years.
Defining a high-value customer requires looking at business outcomes that matter to you. Depending on your business, that could include:
- Total revenue
- Purchase frequency
- Average order value
- Profitability
- Recency
- Retention
- Customer lifetime value
- Product or service mix
The goal is to determine what “best customer” actually means for your business. Once you’ve defined it, you can begin looking for the characteristics and behaviors that distinguish those customers from everyone else.
Question 3: What Makes the Top 20% Different?
This is where the 80/20 rule becomes much more useful for marketers. Knowing that a small group generates a large portion of your revenue is interesting. Knowing why is actionable. What separates your highest-value customers from everyone else?
At first glance, the answer may seem obvious. Maybe they’re older. Do they have higher household incomes? Maybe they live in certain markets. Don’t stop with the obvious characteristics. Your best customers may differ in ways you wouldn’t think to look for on your own.
There could be patterns involving geography, household composition, purchasing behavior, lifestyle characteristics, home ownership, financial indicators, product preferences, or hundreds of other variables. Instead of basing decisions on assumptions, ask what does the data tell us they have in common?
It’s an important distinction. AMP’s own analysis philosophy emphasizes looking beyond basic demographics to uncover combinations of characteristics and behaviors associated with high-performing customers.
Question 4: Are you marketing differently to your most valuable customers?
After you identify the customers generating the greatest value for your business, it’s time to look at your marketing strategy. Are they receiving the same treatment as everyone else?
Same communication frequency? Offers? Channels? Retention Strategy? Marketing Investment?
If your customers don’t contribute equally to your business, does it make sense to invest equally in marketing to them?
Your highest-value customers may warrant a different level of investment. You might communicate with them more frequently, prioritize retention, introduce complementary products or services, or use higher-cost channels where appropriate.
Meanwhile, customers with lower current value may need a completely different strategy. The goal isn’t to ignore everyone outside the top 20%. It’s to stop pretending every customer represents the same opportunity.
Question 5: Are you acquiring more of the customers you actually want?
Suppose your marketing team acquires 5,000 new customers this year. Sounds great, but what if most of them make one small purchase and never return?
Meanwhile, another campaign acquires only 1,500 customers, but those customers purchase repeatedly, spend more, and resemble the customers already driving the greatest value for your company.
Which campaign is more successful? Customer acquisition numbers alone won’t tell you. When you know what your highest-value customers look like, you can evaluate acquisition differently. You can change the conversation from volume to value and evaluate true campaign success.
Question 6: Could your best customers help you find your best prospects?
Understanding your top customers isn’t only useful for retention. It can also help you with acquisition. If analysis reveals meaningful patterns among the customers generating the greatest value for your business, those characteristics can become clues for finding prospects with similar potential.
Instead of building an acquisition audience around a broad definition of your “typical customer,” you can start with the people who have already demonstrated their value to your business.
Don’t Get Too Attached to the 80/20 Rule in Marketing
Focus less on the exact 80/20 split and more on the underlying insight: a relatively small group of customers may generate a disproportionate share of your business. If your customer value is concentrated, look to your data to see where.
What Would You Do Differently If You Knew?
The real value of the 80/20 rule in marketing is what you do with the information once you have it.
Imagine knowing:
- These are our highest-value customers.
- This is how much of our business they generate.
- These are the characteristics that make them different.
- These are the markets where they’re most concentrated.
- These are the prospects who most closely resemble them.
Armed with this information, you can make strategic decisions about where to spend your marketing budget. You can think differently about retention and evaluating acquisition campaigns based on customer quality rather than quantity.
At Analytic Marketing Partners (AMP), we help businesses answer which customers are driving their business and how they can find more of them.
Because knowing you have 10,000 customers is data.
Knowing which 2,000 are shaping the future of your business is insight.
Questions Your Marketing Data Should Answer is an ongoing series from Analytic Marketing Partners exploring the real marketing and growth questions businesses encounter and how data can help answer them.