The 80/20 Customer Profitability Rule
December 18, 2013 3 Comments
Develop intelligent customer service & customer management programs based on customer value insights…
Has your business ever performed an analysis of your customer base to determine any of the following:
1) Which customers are frequent visitors and have the greatest repeat business?
2) Which ones rarely do business with your company?
3) Which ones are the most valuable and profitable to your company?
If you haven’t then you really don’t have the insights necessary to really develop an effective customer service, customer management and/or loyalty program. In performing analytics and customer analysis for nearly 10% of the Fortune 500 companies in the United States, I have found a very revealing and astonishing pattern (rule) in this customer analysis that holds true company after company. The pattern is as follows:
80% of all company profits are derived from ~20% of your customers
Take the chart below (Chart 1) from one of the top US banks that shows 20% of their customers are responsible for 82% of their profitability and that a full 47% of customers are actually unprofitable and not worth having as customer as each transaction costs the bank more than it is worth (each customer interaction/transaction actually drives the bank further away from profitability) {Click on Chart for a larger/clearer image}:
When I presented this customer profitability analysis to the bank, the bank executives were amazed at the results and of the customer profitability distribution. (Note – The deciles were developed using a SAS generated RFM analytics model whereby Recency (How recent customer have visited/purchased), Frequency (How frequently customers have visited/purchased and when they visited/purchased) and Monetary spend (How much they spend and on what types of products/services they spent their $$ on). The RFM model was then used as input into a profitability model, using actual profit data for each product/service/customer using a unique customer id to match the profit data to the RFM score.)Why are these insights and analytics so important and what might the bank or any other business do to manage customer relationships more effectively? These insights are key in developing a customer relationship management (CRM) and loyalty program that is tailored and specific to each customer group.
Note: The 80/20 rule applies to companies that have higher transaction volumes, a diverse set of product & services and a heterogeneous customer base.
Ask yourself the following questions:
- Should your company treat your best and most profitable customers differently than other, less profitable customers?
- Should your company develop special customer programs so that the 20% most profitable customers are not lured away by competitors?
- Do you think your company’s most profitable and valuable customers want to be shown appreciation for their repeat and profitable business in a way that makes them feel welcome and special?
- Is it in your company’s best interest to want to develop strategies and programs that turn unprofitable customers into profitable or at least revenue neutral customers?
The answer to all four questions should be a resounding YES!
Armed with the above insights and analysis a company can start to architect customer intimacy and loyalty programs such as the following:
- Offer most profitable customer special discounts or accelerated loyalty rewards earning rates
- Conduct special top customer, by invite only, appreciation events
- Deliver occasional special top customer gifts or recognition when they interact with you in-person or on-line
- Invite your top 1-5% of customers to participate in an invite only customer advisory board or insights group event every year at an exciting destination where most or all expenses are paid for by your company
- Develop unprofitable customer management programs such that these customers become more profitable, cost less per company transaction and/or they are effectively ‘encouraged’ to migrate to competitors.
Take the same chart above and now overlay customer treatment programs to each customer decile and sub-segment (Chart 2) {Click on Chart for a larger/clearer image}:
- Effective Customer Management Programs Based on Profitability Insights
Even though decile #1 (10% of all customers) has been identified as the most valuable customer segment generating 65% of all company profits, the decile can then be further sub-segmented based on further profitability analysis/decomposition. In this particular case:
- The top 5% of the top profitability decile customers generated 42% of all profits
- The remaining 5% of the top profitability decile customers generated 23% of profits
As shown in the ‘golden’ box (#1) above and below, these top tier customers should be given special access and special attention and made to feel totally appreciated and a partner of the company. The golden box also demonstrates the types of special programs you might want to provide to this top profitability group. It is of your utmost importance to do everything in your company’s power not to lose these most valuable/profitable customers. These suggested treatments are just a sample, but ones I have developed for many clients in the past, including top tier banks, retailers, life sciences companies, telecommunications providers, etc. {Click on Chart for a larger/clearer image}:
The next (Green) group of profitable customers highlighted in box #2 (below) can receive special treatment as well, but not quite the golden treatment as the most profitable 5%. These next valuable set of customers would still receive top customer treatment, but not quite the platinum access that the most valuable 5% would receive. You wouldn’t want to lose these valuable customers either, so their treatment would still be special, memorable and differentiated vs. your competitors. {Click on Chart for a larger/clearer image}:

Next Top Set of Customers Receive Top Treatment, but not Special Access, Handling Like the top 5% (Platinum) Group
The blue box (#3) in the chart below speaks to customer migration programs that incentivize customers to spend more, visit your company (physical or online) more, purchase higher value items, buy in bundles, etc. {Click on Chart for a larger/clearer image}:

Effective Customer Management Programs Effectively Transition Customers into More Valuable Customers Over Time
One very effective way to do this is to develop what I call modeled incentives. In that, if a loyalty program is to be effective there should be an incentive for the customer to model the behavior to achieve the next loyalty reward level and the following must be present:
1) Every customer group must know what they need to do to achieve the next loyalty rewards level
2) Customers need to feel the next loyalty rewards level is significantly more valuable than their existing level
3) There should be prestige and/or notoriety associated with achievement of the next loyalty rewards level so that customers feel privileged, special and differentiated from regular customers.
Lastly, the red box (#4) below speaks to customer management programs that need to either turn these unprofitable customers into profitable customers or find ways to reduce the cost to serve these unprofitable segments. Some strategies including limiting these customers to self-service, providing incentives to transact during off hours, incentivizing them to seek lower cost providers, etc. {Click on Chart for a larger/clearer image}:
The bottom line is that, through customer insights and analytics, you will find that not all customers are the same in terms of profitability (the 80/20 rule), therefore it makes no sense whatsoever to treat all customers the same. Through a robust customer insights program you will then be able to leverage these insights and develop a sophisticated and custom loyalty and retention program in order to accomplish the following:
- Develop break-away tier 1 (Platinum) loyalty programs that stand alone in the industry such that your top 1-5% most valuable customers would not even consider defecting to another provider
- Develop programs to retain your most profitable customers and make them want to remain a loyal customer
- Develop a loyalty migration path for customers to want to achieve the next loyalty rewards level (Silver, Gold, and Platinum) so that they simultaneously feel more recognized/special/connected to the company while providing your company great value/profits/monetary return.
- Develop programs to mitigate expenses when dealing with your least profitable customers (more self-service, helping them ‘discover’ lower cost competitors, offering more limited services, etc.) (the other 80%)
Achieving Market Leadership by Effectively Managing Customer Loyalty and Advocacy
September 11, 2015 1 Comment
To find out the answer to these questions, read the rest of this informative blog article below.
Customer Loyalty & Advocacy
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Your customer base is almost always represented by the above spectrum of customers. What varies from business to business is the percentage in each segment group. The more well managed your business, the more skewed to the right your customers tend to be. Therefore a business must develop strategies to migrate customers continually from the left to the right from segment group to segment group in increasing numbers. The rest of this blog is dedicated to sharing best practices on how to migrate more of your customers to the right of the spectrum.
Customer Loyalty and Advocacy Framework
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For any company to achieve world-class status, one must carefully map out a customer loyalty and advocacy framework including the following component steps from the chart above:
Customer Loyalty & Advocacy Framework Segments
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The above customer loyalty & advocacy framework includes the following segments:
A formal social and company/brand listening and tracking program is a best practice on how to identify which of your customers exist in each of the above segments (see my previous blog entry on the topic of Social listening programs).
Customer Dissenters & Defectors
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From this graphic above, we can see clearly that the strategy should be as follows:
Unless the individuals in these segments are high value or high profitability customers, then you would want to minimize the financial rewards to these customer satisfaction segments.
In addition and based on my research and experience, you are wasting your marketing and sales $$ spend to these two segments as they are much more unlikely to respond to any marketing offers due to being so currently dissatisfied with the company and brands (think about it – why would they trust you and buy more of the same when their initial experiences were so terrible?).
Customer Neutrals & Supporters
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From this graphic above, we can see clearly that the strategy should be as follows:
Customers in these segments should be offered tiered financial rewards to incentivize them to want to contribute at even higher levels to brand value and to remain even more loyal to the company and its brands.
Customer Advocates & Super Advocates
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From this graphic above, we can see clearly that the strategy should be as follows:
Customer Loyalty & Advocacy Cross-Segment Best Practices
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The graphic above highlights just a few of the cross-segment customer loyalty & advocacy best practices I recommend that companies continually practice to migrate customers from the negative segments that hurt the company’s brand value (dissenters, defectors) to positive segments (advocates and super advocates) that adds incredible value to a company’s brand.
Here are the brands for which I am a Dissenter, Defector, Neutralist, Advocate and Super-Advocate for based on my own personal experience and opinions:
Companies For Which I am a Dissenter
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Sears
Sears – I received abject customer service back in the late 1980’s and don’t want anything to do with the retailer ever again. I have tried to give them a second chance and continue to have an unsatisfactory experience. I pledge to never set foot in a Sears store again.
Target
Target – I interviewed for a senior management position at Target a several years ago was treated so poorly that even the HR manager at the time said the treatment of me was ‘questionable’. She then shared with me that she asked upper management “are we really trying to hire the best candidate here?” before she left the company. I vowed to never shop in Target again and have held true to my word.
Empire Carpet Today
Empire Carpet – We had several issues with our carpet installation and follow up customer service. They are very disorganized, non-customer friendly and do not seem to keep with the volume of sales that they generate. I will never use this company ever again. We steer people away from this company if asked.
2) Companies and Brands I am likely to Defect from or have defected from and tell everybody about why I am about to leave (or have left) these company & brands:
Companies for which I am a (potential) Defector
Bank of America
Bank of America – Closed many of the local branches where I live and the abundance of local branches was the reason I opened an account with BOA in the first place. The remaining branches are now crowded and not staffed adequately. This tells me they care more about the bottom line than customer satisfaction.
Marriott
Marriott – In my opinion Marriott has lost its way. I used to be a Platinum member at Marriott for many years. Their properties since that time have become worn as compared to their competitors and they seem to not listen well to their customers. An example of this myopia is when they converted the Courtyards to the Bistro concept. Every customer I speak to was disappointed by this change but they went ahead and did it anyway (presumably to save $$ on operations costs).
Frigidaire/Electrolux
Frigidaire/Electrolux – Our dehumidifier stopped working after only 1 year. We have been trying to get a credit from them for six months with no end in sight. The return process is the most customer unfriendly I have ever encountered with no possibility of human interaction. We have been without a dehumidifier for an entire year due to their poor customer service process.
3) Companies and Brands I am Neutral about and don’t really have much to say about them:
Samsung, Sony, Direct TV, Time Warner Cable, Panasonic, Cuisinart, Hunter Fans, Home Depot, Lowes, Macy’s, Sunoco, US Air, Delta, Tractor Supply, Wal-Mart, McDonalds, Burger King, Chili’s, Pizzeria Uno, American Airlines, Holiday Inn and many more. This category contains the most number of brands due to the distribution across segment group being shaped like a bell curve
4) Companies and Brands I am an Advocate of and share positive stories with anybody who is willing to listen:
American Express
American Express – I have worked with American Express as a consultant on several different strategic projects. They are an extremely well run organization with some very smart people running the company. I have also been a Platinum card member for many years. They provide excellent customer service and their fee structure is the only thing keeping me from being a super-advocate. I tell everyone I meet I consider American Express a world-class company.
Southwest Airlines
Southwest Airlines – Southwest is just a great airline and makes the flying experience pleasurable. They are almost always on-time, the employees are friendly (some even humorous) and they try to be reasonable to their customers at every turn. I used to hate Southwest and am now a Southwest lover/advocate.
Hilton Hotels
Hilton Hotels – Did you guess what hotel I become more loyal to after minimizing my Marriott loyalty? Guess no further. Hilton has been on a roll creating new and invigorating hotels and I am now an advocate/loyalist and stay at Hilton Hotels whenever possible.
Dooney & Bourke
Dooney & Burke – Dooney & Bourke creates high quality, classic and trendy handbags and accessories that last over long periods of time even with heavy usage. Styles and collections are priced to reflect the consistent durability and attractiveness of this brand. If something goes wrong with their products, they stand behind them through high quality customer service.
5) Companies and Brands I am a Super – Advocate of and go out of my way to tell everyone how wonderful my experience has been with dealing with these companies:
Companies For Which I am a Super-Advocate
Cox Automotive
Cox Automotive – Cox Automotive has a great company culture consisting of many top automotive brands that includes Kelly Blue Book, Autotrader, Manheim, NextGear, DealSheild to name a few. The company is one of the best places I have ever worked and includes an employee first culture that they actually adhere to and practice. The company is run by a world-class CEO named Sandy Schwartz that has a great vision for the company’s future and is very visible in his support for the employee oriented culture.
Toyota
Toyota – My family has owned Toyota vehicles for many years. Toyotas are extremely reliable automobiles. I have a Tundra with 132,000 miles on it and have had zero major issues with it. I have such an affinity with my Tundra I have a hard time thinking about trading it in for another vehicle even though it would most definitely be another Toyota.
Ritz Carlton
Ritz-Carlton – I love staying at Ritz-Carlton since the experience each and every time is truly memorable. I also worked as a consultant for Ritz-Carlton to help design the perfect customer experience for guests. Ritz Carlton’s goal is to create an experience to remember and smile about and they live up to this promise every time.
The amazing (or sad) part about my sentiment rankings of the above companies is that, despite spending millions ($$$) on analytic systems and databases, I am willing to bet that very few, if any, actually were knowledgeable about my sentiment toward their brands prior to my writing this article.
This relates directly to a previous blog entry I developed on why CRM (Customer Relationship Management based on historical analytic insights) is dead and a new CRRM model is now a best practice. In this article I point out how world-class companies now query their customers how they feel about the company and brands on a periodic basis. Like me, many customers would be more than willing to share their sentiment and how they are feeling towards the company and their associated brands. Bottom Line: Analytic models provide minimal understand of true customer sentiment when it is primarily focused on historical purchases, spend, etc.
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Filed under CRM, Customer Profitability, Marketing Tagged with abject customer service, American Express, Bank of America, best customer satisfaction management programs, best customer sentiment management programs, bottom tier customers, brand affinity, brand champions, brand detractors, brand identity, brand image, brand images, brand passionate, brand supporters, brand word cloud, brand zealots, companies with crappy customer service, companies with great customer service, companies with poor customer service, company champions, company passionate, company public image, company reputation, company word clouds, company zealots, Cox Automotive, cross-sell products, cross-sell services, customer advisory boards, customer advocacy, customer advocacy best practices, customer advocacy councils, customer advocacy management programs, customer advocate, customer advocate programs, customer advocates, customer awards ceremonies, customer brand identity, customer communications programs, customer councils, Customer cross-segment best practices and processes, Customer Defection Prevention, customer defectors, customer destroyers, customer dissenters, customer engagement levels, customer engagement scores, customer financial rewards, Customer focus groups, customer lifetime value, customer lifetime value and customer satisfaction, customer loyalist, Customer Loyalty, Customer Loyalty Best Practices, customer loyalty programs, customer management cost containment, customer management costs, Customer Management Programs, customer management strategies, customer negative buzz, customer neutral, customer participation rates, customer positive buss, customer recognition, customer recognition programs, customer referral network, customer referrals, customer rewards, customer rewards programs, customer roundtables, customer satisfaction brand management, customer satisfaction improvement, customer satisfaction improvement programs, customer satisfaction levels, customer satisfaction ratings, customer satisfaction segments, customer satisfaction word cloud, customer segment definitions, customer segment management, customer segment migration, customer segment strategies, customer segment strategy, customer sentiment brand management, customer sentiment segments, customer sentiment trends, customer sentiment word cloud, customer service continuum, customer service cost reduction, customer service from hell, customer service levels ratings, customer service nightmare stories, customer service spectrum, customer spend and satisfaction, customer supporters, customer top advocates, Customer Value, customer win-back, customers from hell, dealing with angry customers, dealing with irate customers, dealing with unhappy customers, destroy brand image, destroy company image, destroying brand image, Dooney & Bourke, efficient customer service, electrolux, Empire Carpet, Empire Today, firing customers, Frigidaire, great customer service, happy customers, high profitability customers, high value customers, Hilton Hotels, impact from great customer service, impact of poor customer service, impacting brand image, increase customer value, irate customers, irrational customers, isolating angry customers, low value customers, lowest profitability customers, marketing and customer satisfaction, Marriott, mid-tier customers, most loyal customers, negative brand comments, negative brand sentiment, negative company comments, negative customer sentiment, net promoter score, net promoters, neutral brand sentiment, neutral customer sentiment, nightmare customer, nightmare customer service, poor customer service, positive brand comments, positive brand sentiment, positive company comments, positive customer sentiment, Ritz Carlton, Sears, Southwest Airlines, Steven Jeffes, target, top customer advocate, top tier customers, Toyota, tracking customer satisfaction, unhappy customers, up-sell products, up-sell services, valuable customer segments, word of mouth negative comments, word of mouth positive comments, world-class customer satisfaction management programs, world-class customer sentiment management programs