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The Pareto Principle (80:20 rule) in Customer Success represents that 80 percent of your revenue is from 20 percent of repeated customers or loyal customers
Chances that you may have heard about the 80:20 rule or the Pareto Principle are high. The Pareto principle is also called the law of the vital few. The idea is- 80% of the effect is produced from 20% of the cause of the event.
In 1906, Vilfredo Pareto from Italy made an observation that nearly 80 percent of Italy’s land was owned and controlled by nearly 20 percent of the population. This finding led him to explore other countries where he noticed similar situations. This principle has then been applied to various spheres like software, business, marketing, and more. In marketing, the Pareto principle says that 80 percent of your sales are represented by 20 percent of your customers. If companies break free from this, they will increase profits.
So, how does this fit with Customer success? What is the Customer Success Pareto Principle? That is what we will find out in this post.
A well-known customer success law, the Pareto principle says that repeat customers generate revenue that is nearly 16 times more efficient than one-time customers. The potency of 80/20 is that 20 percent of a group is responsible for 80 percent of the sales. So, if you can retain customers or make them more than one-timers, the chances of revenue earned is more.
For example, 20 percent of repeat customers are responsible for 80 percent revenues. Their revenue efficiency is 80/20 = 4.
For 80 percent of one-time customers, the contribution to the revenue is 20 percent. Their revenue efficiency is 20/80 = 0.25
This stresses on the importance of customer retention and customer loyalty. Customers have the power to maximise profitable income and minimise the misuse of investment and assets. Here are some points every company must consider before making any decision.
Number of Customers: How many customers constitute the 80 percent and how many the 20 percent? This will be useful in determining if the customer base is increasing or shrinking.
Locations: Knowing where your customers are located also helps. This helps understand the potential for growth in specific geographic locations.
What do they buy: Understanding what customers buy and why is also helpful. This will improve profit outcomes.
Every customer contributes to the market share. The size of the organisation is what affects the market and helps find scope for investment. It is important to keep the Pareto principle in mind while not faltering on keeping customers retained.
Customer support is integral to any business. The need to ensure that customers are satisfied is important for any business. As per the Pareto Principle, nearly 80 percent of customer complaints are about 20 percent of products or services. This means if one analyses which products or services are causing problems- the chances of sorting these customer service issues are higher. By keeping the 80:20 rule in mind, you can also focus on how customer service personnel address a customer complaint. This way we can understand what aspects of the customer service need to be altered.
To make sure customers get the revenue as per the Pareto Principle, there needs to be a revenue shift. A loyalty rewards program will help shift revenues to more stabilised sources. This will map for revenue increase in an 80-20 distribution.
The Pareto Principle for customer education says that focusing on 20 % of your product that 80 percent of users will realise.
80/20 is highly successful for businesses and organizations. Find out which 20 percent of your products are contributing to 80% of sales or profits. Keep improving on the marketing, sales, and development of these products. You can amplify the sales of these products to get better profitability. Compare how data looks and draw insights from it.
Of your repeat buyers which 20% are responsible for 80% of repeat purchases? Re-connect with them. Consider finding out what made them leave. Focus on nurturing your relationship with them. Which states or nations do most of your sales come from? Does it make up 80%? Of the region? Improve marketing efforts there.
I understand your interest about how this works! When applied correctly, the Pareto 80/20 rule sales actually makes it simpler to think.
Let us assume that your company offers three distinct subscriptions. Graph this out against Sales per product type vs. Profits to bring it into view for a clearer picture. discover which subscription is the most popular. This is how the Pareto principle works in customer success.
Put this to further use by tabulating the Sales for the preceding month, subtracting all costs from profits, and then filtering the information according to Return on Sales (i.e. Profit/Sales*100%).
ProductSalesIncomeReturn on SalesX2,0001,25062.5Y20,0005,00025Z1,20025020.8Total23,200650028.02
In the second table, total the responses along with the cumulative sales percentage for each subscription, the percentage of group sales for each subscription, and the same for profits with the group and cumulative percentages.
Product% of sales in the group% of sales in cumulative% of profit: group% of profit cumulativeX220.127.116.11.8Y10.315.638.146.5Z1.518.83.851.4
From this, you may determine which subscription generates higher profits and which subscription requires a sales increase of twofold. Increasing the final product as a result.
Be aware that this is one method for handling renewals.
Customer segmentation is an approach that can be used for growth or upselling.
Think of these usage examples;
Find the 20% of recurring customers who make up the 80% of recurrent purchases.
So, here is what you do, reconnect with them!
Calculate how 20% of the total clients account for 80% of the revenue.
You must nurture your connection with them.
Determine which 20% of the clients are responsible for 80% of the complaints.
Guess what will get rid of them.
20% of those repeat customers, we can infer, are prepared for upselling!
It can mean that 20% of your customers account for 80% of complaints. It can mean that 20% of product features cause 80% of the program bugs.
Vital Tasks20% Attention80% OutcomeThese are vital tasks that are necessary and vital for the success of the business.You can focus 20% of time on making sure these tasks are done in a right manner.This will lead to 80% of outcome due to their importance.
Before anything, it is important to define user types. With knowledge of different user types, we need to train CSMs to understand and track them. This will help customers get an idea of the unique aspects of the product.
Customers have a lot of things in common. You can always find threads that run through them making them similar. Find out the 20% use cases in almost 80 percent of customers. This will help engage with customers, understand their goals and objectives behind using the product or service. When we understand their motivations, they will stick to guide users along.
Use the Pareto Principle here- find out the 20% of cases where 80% of customers need help. With the information that will address these issues, CSMs need to help. CSM communication is a scalable way to help customer respond better to various situations and make better use of products.
To apply the 80/20 rule in customer success, you need to create the right content. There is no need to create a lot of content. It should be minimal and possible to leverage across the company. Good blogs, marketing videos, knowledge articles, and documentation will help customers get the information they need.
The next way is to understand and define user roles. Understand what each role needs to do and deliver accordingly. If you align user outcomes with product, you can make sure training is optimised for outcomes.
The Pareto Principle is powerful and can be applied to any business. The 80/20 rule can be applied to any business to understand profitable income, market share, geographic coverage, and overall costs. This will help understand opportunities for growth and productivity. Applying the 80:20 rule for customer success will save a lot of time, effort, and resources. However, it is not a method to explain or come to an analysis about an event. It helps us understand what should be focused on for better yield, improved growth, and impact on end goals. This will help identify what aspects of the business are not at their full potential and why. Using the Pareto Principle in Customer Success will help identify how to optimise customer success operations for overall business growth.41
Kruthan Appanna is a Customer Success Analyst with 5 years of experience. Passionate about leveraging data-driven insights to drive customer satisfaction and retention. Skilled in building strong client relationships and providing strategic solutions.
Published March 17, 2021, Updated June 07, 2023
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