Here's why tapping your top-volume clients for further growth doesn't always work.
In most marketing circles, the principle behind the 80/20 rule applies to the relationship between your revenue and your customers. That is, 80% of your business results are being driven by 20% of your clients, or pretty close to it.
It's considered easier and more cost effective to grow your business by increasing the business volume your existing clients do with you, as opposed to bearing the higher acquisition costs associated with hitting the open market and trying to grab the attention of clients who don't currently deal with your company.
It is no surprise, then, that many marketers are investing heavily in identifying and segmenting their "top 20%" with the intention of developing marketing campaigns and sales promotions just for this elite group of customers, with an eye to acquiring more of their business. After all, they are clearly heavy users of your company's product or service and are apparently willing to spend money with your company versus your competition.
However, such an approach overlooks the fact that many companies identify their top 20% of clients on a volume basis. This creates a phenomenon that I call the 80/20 Volume Paradox: While your top 20% of clients may be driving a big chunk of your business and displaying all of the signs that they represent a great target audience for your marketing efforts, they may not deliver a strong ROI on further business development efforts. Why? Two possibilities:
They're tapped out.
There are only so many hotel stays or onite computer consultants that a client can want or need. As a result, marketing efforts aimed at this group may produce only a minimal incremental lift in volume.
They're buying cheap.
Of the incremental volume you succeed in generating from this group, it will likely be at a lower margin, as high-volume clients generally buy at a lower price. This is especially true in business-to-business relationships, where contracts are often structured to include significant volume discounts.
To address these shortcomings of some of the traditional approaches to driving business through your top volume clients, here are two fresh approaches to looking at your top clients that put a slightly different spin on the 80/20 rule.
Think margin, not volume
Instead of identifying the top 20% of your client base in terms of volume, use margin instead. Identify the top 20% of your clients as measured by total margin, and cross-reference that list against your previously identified top 20% by volume list. You may be surprised to find that the two lists are not quite the same.
Your top 20% by volume are probably already being rewarded with volume pricing and various discounts. As a result, you might find a gem or two on your top 20% by margin list—clients who are doing moderate volume with your company, but at higher prices and therefore higher margins. Get the same sales lift out of this higher-margin group and you'll add more to the bottom line than by pursuing your volume clients only.
As an added bonus, higher-margin clients doing less volume with you may not be "tapped out" and may have room to increase their demand for a product or service. And, they are still your clients, which means you can approach them with marketing programs and promotional offers while enjoying the low acquisition costs that come with knowing your target audience.
Instead of identifying your top 20% by volume and targeting them, perhaps you should cast your net wider and target the next 10% of your clients based on volume. Instead of 80/20, shift your thinking to 90/30—driving 90% of your business from 30% of your clients.
Looking below the 20% line will uncover some clients where a great "share of wallet" opportunity may exist. In this group, you are more likely to find clients who are giving at least some of their business to your competition, representing a great opportunity for you to consolidate their purchases with just one company: yours.
You may also uncover clients not as likely to be receiving heavily discounted pricing with competitors, since their purchasing is more fragmented. This gives you the option of using some pricing leverage to build volume. (Of course, building volume at the client's current rate would clearly be preferable.)
This group of clients is also less likely to be tapped out—perhaps they can be encouraged to purchase more of the service you offer, or perhaps you can wrestle a higher share of wallet out of these clients buy getting some portion of their business that is currently going to a competitor.
It is important to understand who the clients are that are driving the majority of your business, and even more important to retain their business. However, growth within your client base is often not as simple as identifying your top-volume clients and milking them for more revenue.
Don't be afraid to put a different spin on the 80/20 rule the next time you analyze your client base. You may find that turning down the volume focus will allow you to identify other good marketing opportunities among your clients.