How Can You Measure Customer Profitability?

Before spending time discussing customer profitability (or relationship-based marketing in general) it makes a whole lot of sense to figure out who one’s customers are. ‘What a customer is’ likely means different things to different people within the company. Also it’s extremely important that you calculate customer profitability so that you know the profile of your ideal customer.

Once you have recognised who your customers are, the next issue that pops up is if you can recognise them in the data. It needs to be identified which transactions and accounts relate to a given customer. Otherwise, you cannot achieve an actionable view of their behaviour and its implication for profitability of the company.

What Is The Pareto Principle?

The Pareto Principle, which was named after Vilfredo Pareto who was an esteemed economist, specifies that 80% of outputs come from 20% of the causes. This means that there is an unequal connection between inputs and outputs. This principle serves as an overall reminder that the relationship between inputs and outputs is not balanced. The Pareto Principle is also called the Pareto Rule or the 80/20 Rule.

The first observation of the Pareto Principle was linked to the connection between wealth and population. According to what Pareto observed, 80% of the land in Italy was owned by 20% of the population. After studying a number of other countries, he found the same applied abroad. For the most part, the Pareto Principle is an observation that things in life are not always distributed evenly.

Why Does The Pareto Principle Matter In Business?

The Pareto Principle is an incredible tool to use for growing a business. For example, if you can figure out which 20% of your time produces 80% of the business’ results, it is possible to spend more time on those activities in addition to less time on others. Also, by identifying the characteristics of the top 20% of customers (who represent 80% of sales), you will be able to find more customers like them and dramatically grow sales and profits.

As a sales manager, the goal should be to zero in on those 20% of customers who are essential for the business’ prosperity. Analysing results, with the Pareto Principle in mind, can show the channels and segments that are the most responsive to one’s initiatives as well as the areas of your business that are more important in terms of outcomes. This will help make the most of sales efforts.

The Pareto Principle is not a method for completely eliminating the non-critical aspect of any given situation. It is rather a simple phenomenon which allows us to shift our focus to the areas which will have the most significant effect on the end goal and will produce the greatest results. The most successful businesses make use of the Pareto Principle in order to ensure that all operations, which are conducted within the business, are contributing to the overall success of the organisation.

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