The Pareto principle says that 80% of your success is a product of 20% of your efforts. For a business that means getting 80% of your business from the top 20% of your customers: those loyal customers who frequently and repeatedly purchase from you. I call them the “Golden 20%.” If you’re not reaching that figure you might think that you are achieving a balanced book of business. Look deeper, you might find that your customers are not loyal. How do you keep customers coming back for more? How important is customer loyalty from the Golden 20?
Here are some ways to encourage customer loyalty and develop a base of the golden 20% that will provide you with 80% of your business.
Loyalty programs – Reward customers over time with special privileges and bonuses. Airlines do this for their loyal customers, allowing them “Elite Access” privileges like a special express check-in counter and early boarding. What perks and privileges can you offer to the best 20% of your customers?
Frequency programs (I call these cheese programs) – The more frequently you buy, the more you are rewarded. Frequency programs typically focus on discounts or free stuff. For example, at Common Grounds coffee house near Baylor University, buying 12 drinks gets you $3 off your next purchase. The problem with frequency programs: What if someone offers a bigger discount, or requires less frequency?
Remarkable experiences – If you watched the video at the Common Grounds website link above, you see that their customer loyalty is more likely a product of a remarkable experience rather than the frequency discount. Customers kept mentioning the “community” feel at common grounds. In fact, the customer experience is the number one determinant of customer loyalty.
Dancing Bear Pub is a small craft brew pub in my hometown of Waco that has a very loyal customer base. The décor is average at best, the price of beer is higher than other bars in town, and there are no frequency programs. But that’s ok to the loyal customers. They go to Dancing Bear for the craft beer experience; beers you cannot find anywhere else in town…and no light beer.
Asking customers to shop – People get busy, people forget, life happens. Sometimes your best customers need to be reminded to be loyal. Reaching out to them by email, a postcard, even a phone call can reel them back into the business. Know who your Golden 20% are and make sure your have their contact information. Reach out to them systematically and invite them back to do more business. Combine this tactic with one of the other three listed above.
The Impact of Loyal Customers
What impact could this have on your business if you were able to achieve the Pareto business balance? You might find the numbers staggering. As an example, if the top 20% of your customers currently account for 50% of your business, achieving 80-20 would increase your business by a whopping 250%! Here is the breakdown:
- 80 customers = $500 (50%)
- 20 customers = $500 (50%)
100 total customers = $1000 total business
(20% of your customers account for 50% of your business)
It’s important to note that increasing the share of business from the golden 20% will not influence the business from the bottom 80% if your customer base. That part will stay the same. Here’s how it looks:
- 80 customers = $500 (20%)
- 20 customers = $2000 (80%)
100 total customers = $2500 total business
(20% of your customers account for 80% of your business)
This is a huge impact to your bottom line! In this example a 250% impact. So, if you are ready to achieve Pareto principle-like success, ask yourself: “How do I keep customers coming back?”