Chapter 3 80% of business comes from 20% of customers

"80% of business comes from 20% of customers." This adage, commonly known as the 80/20 rule, comes from the American quality management guru Joseph Juran (Joseph Juran). In the late 1930s, at a car assembly plant in Detroit, Juran conducted research on how defects entered the production system and concluded that 80 percent of the problems were caused by 20 percent of the system. He dubbed the phenomenon the Pareto Principle, in honor of the Italian economist Vilifredo Pareto, who observed that 80 percent of Italy's wealth was stolen by 20 % of people have. Juran further applied the theory to other business aspects: 80% of profits are generated by 20% of employees; 80% of costs are generated by 20% of the company's departments; finally, 80% of sales come from 20% of customers.

The exact percentages are less important than the principle: a small group of customers who usually buy a disproportionately large chunk of sales, buy frequently, buy in large quantities, or both. To a large extent, studies of purchasing patterns confirm our common sense: families with young children buy a lot of laundry detergent; high-volume manufacturers order more raw materials and components than small-volume manufacturers, and so on. Therefore, this law is basically correct in theory, the problem is how to apply it.In Juran's discussion of this law, he used two key terms. He called the majority (ie 80% of customers) the "useful many". Without these people, the company would suffer losses, but survive; the 20 percent he calls the "vital few," and the loss of even a small number of customers would put the company in trouble.

There are two strategies to choose from, the first is to focus on the "critical few" and gradually move away from other customers, however, this can lead to businesses putting all their eggs in one basket and when customer needs change , companies will reap the consequences. A few years ago, Ford and General Motors decided to focus on lucrative sport-utility vehicles.Now that consumer demand for the model is rapidly declining, both Ford and GM are scrambling to find alternative strategies while losing money. Another strategy is to take different approaches to different customer groups, which requires marketers to approach key customers to encourage them to spend more, while also reaching marginal customers to encourage them to spend more.

This strategy helps increase profits and reduces dependence on a small number of customers.Tesco, the British supermarket group, has done just that, using different methods to attract different customer segments and make them even more attached to Tesco.As a result, Tesco's sales accounted for 7% of all store sales in the UK. In some cases, it may be right to focus on the “key few” and forgo other customers, but such a decision is by no means an easy one.Before you do that, think about how hard it is to get those customers, and remember that if you let them go, it will take double the effort to get them back later.