The Pareto Principle, or 80-20 rule, is commonly recognized in business as a reason to take care of your most profitable, loyal customers. It indicates that generally speaking, roughly 80 percent of a company’s profits are driven by the top 20 percent of its customer base. However, the Pareto Principle fails to address the remaining 80 percent of your customers.
The following is an overview of the Customer Pyramid, with strategies and tips on how it should effect your business decisions!
This upper tier of your customer base includes people that spend top dollar or typically buy a lot of goods and services. These customers are also heavy users, in most cases, and trust your company enough to try new offerings.
A basic marketing principle is to continue to tap into your most profitable customers as a primary growth strategy. Therefore, targeting people that match your loyal customers is an efficient strategy. Loyalty programs, frequency programs, and other incentive programs are a common strategy for retaining your core customers.
Gold and Iron Customers
Gold customers may visit your store or website as often as platinum customers, but they are more price sensitive and more likely to shop competitors for better deals. If your business is very profitable, your gold tier (around 21st to 50th percentile in profitability) customers may still provide a profit. Targeting these buyers with similar incentive or rewards programs, and doing things to strengthen the relationship and drive them up the customer pyramid, are common strategies.
The iron tier consists of people that are even more price sensitive than gold customers, and less likely to ever become loyal to one provider. Thus, they are unlikely to ever offer a return on investment for marketing or service dollars. Therefore, common practice is to operate with indifference toward this tier (around 51st to 80th percentile) and just accept the modest business you gain from them.
A primary reason to understand and evaluate the customer pyramid is to consider the importance of lead customers, in addition to your platinum customers. This tier (around 81st to 100th percentile) includes people that are a drain on your business; they cost you more money to serve than you generate in revenue. They do so by only buying deeply discounted items, demanding a lot from your service staff, and routinely returning or exchanging items.
The goal is to subtly usher these people elsewhere as they can negate much of the profit you generate from your platinum core. Tighter return policies and a pricing policy that charges these customers for extra services are typical strategies.
The Customer Pyramid model offers a much deeper perspective on how to handle relationships within your entire customer base. Recognizing your different customer tiers allows you to better invest your resources to drive profits. Additionally, it helps you identify the ideal customer type that fits into your platinum level, so you can target more of these types of buyers.
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