If you work with marketing or a have an interest in business you might have heard about the Pareto Principle, or the 80/20 rule as it’s also known as. The Pareto Principle refers to the theories and methods by Italian economist and sociologist Vilfred Pareto, used especially to expressing the income distribution of a society as follows; 20% of people have 80% of the goods. In modern marketing its meaning is taken further – often to say that 20% of customers provide 80% of a business’ revenue.
It might sounds extreme – and the numbers may not be 100% accurate, but the baseline is true. Wealth is extremely disproportionately distributed, and regular customers are the most valuable to a business due to their higher lifetime spend. That’s why loyalty cards are so effective – it incentivises repeat business. On the other end of the spectrum it is why massive ad campaigns can be detrimental for smaller business. Without a well known name and deep pockets it is hard to succeed by chasing the bargain hunters. You might read that and think – then how on earth am I ever going to succeed? Independent retailers rarely have unlimited budgets – but even if they did, focusing solely on attracting new business isn’t the smartest way to go.
We discussed this in a previous blog post. There is no point in keep refilling the bucket if there’s a hole in the bottom. Focus should always be first on plugging that hole. Make sure the customers you get remain your customers. Only when you have the plug, should you give some of your attention to filling it up. In case the analogy isn’t clear; there is little point spending your time and money attracting new customers if they are only going to visit you once. Incentivise repeat visits and you’ll be well on your way to establishing a profitable business. This is well known in the industry – but few stores are benefitting as they should. What most of them offer as an incentive is a paper or plastic loyalty card, or discounts sent to their customer e-mails. But how many times have you forgot to drag out your loyalty paper card? We’ve all been there – ruffling through our wallets looking for that one particular bit of plastic or paper, only to realise it was in the midst of that wad we removed the other week to free up some space for change. And this is why more and more companies are getting on mobile – they realise that if they want to reach their customers and keep them engaged, they need to do it in their space. It might not be true for every business – get to know your customers and find the plug that is right for you.
The value of regularity is indisputable though – a study done by the Center for Hospitality Research at Cornell University showed that revenue from frequent hotel-guests increased 50% annually after they joined a loyalty program compared to those who did not.