People Are People, just like the song says, but that doesn’t mean that we all believe the same things or act in the same ways. On the contrary it is these very disparities in behavior and belief which make targeting a customer group so important.
Way back in 1906, an Italian economist Vilfredo Pareto observed that 80% of the land in Italy was owned by 20% of the population. Now that’s a pretty ‘macro’ observation, but he actually developed his principle through a very different ‘micro’ observation. He discovered that in his own garden, 20% of the pea pods contained 80% of the peas. His professional audience required a slightly more official-sounding explanation and that’s how we came by The Law of the Vital Few, or if you prefer, the Principle of Factor Sparsity, which states that in many if not all cases, 80% of the effects in any event originate from 20% of the causes.
The Law of the Vital Few has been applied to business theory in many ways. For example:
- 80% of your profits come from 20% of your customers
- 80% of your complaints come from 20% of your customers
- 80% of your profits come from 20% of the time you spend
- 80% of your sales come from 20% of your products
- 80% of your sales are made by 20% of your sales staff
A brand can realize dramatic short-term improvements in profitability and long-term improvements in brand health by focusing on their Most Valuable Customers.
Now, that’s great, but how do you find out which 20% matters for you? Well, historically that’s not been an easy nut to crack, so we decided to build a better nutcracker. We’ve developed and proven a systematic process that combines socio-demographic data with sales and transaction data to identify this vital target, your brand’s Most Valuable Customer.
When we say understanding, we don’t mean customer satisfaction or other competitive benchmarking measures. To us, ‘understanding’ the customer means understanding what kind of people they are, what they believe and how they act as a result of those beliefs. When we say Most Valuable Customer, we aren’t referring to all of the people that purchase things from you. Nor are we referring to your competitor’s customer, or some faceless person that doesn’t yet know about, or purchase your product. “Most Valuable Customer” refers to the group of individuals that in aggregate spend more money more often (and often in fewer transactions) and who rarely consider your competitive set as an option – no matter what your competitors do or say! They are often a relatively small percentage of your total number of customers, but they account for the lion’s share of your sales. They’ve been given many names: Evangelists, Zealots, Advocates, Ambassadors – but we call them your Most Valuable Customer.
Your MVC is the person that actually loves your brand and proves their love for it day-in and day-out through an extraordinary amount of emotional, experiential (and monetary) involvement with it. Although we refer to Pareto’s (80/20) Principle as a mnemonic to describe this phenomenon, it’s only a general guide for recognizing the relatively small size of the most important customer group and the relatively large contribution it makes to your brand’s success. Some brands we work with find that less that 17% of their customer base is responsible for 70% or their sales and some find that 30% are responsible for 66% of sales. The point is not to get the percentage to break at exactly 80/20, but to clearly define and understand The Vital Few.