“Nine times out of ten, any new customers that are acquired will do nothing to increase profits.” 80/20 Manager, Richard Koch
- When Steve Jobs 2.0 revived Apple, he immediately cut 70% of the products that contributed nothing or have a negative impact on profits and cash.
- The iPhone was a loser in terms of market share but dominated profits. Soon after its release it captured 4% of the market share but 50% of the profit share according to Walter Isaacson.
- Out of the top 100 words used in almost any language, 20% are used 80% of the time – Zipf’s Law.
- Southwest Airlines provides 4% of all flights flown in a day and is often the most profitable airline in the world each year (~$1B in 2021)
These imbalanced outcomes are everywhere in terms of cities’ populations, companionship, clothes worn and food consumed. They are vividly evident in business.
Per the first revelation above, if 90% of your profits come from 10% of your customers, then adding one more of those highly profitable customers is worth over 80 of the other category of customers – minimal to no or negative profit .
The assumption that all sales are good leads to profitless growth, unhappy team members, overworked managers and poor service to your best and most loyal customers.
Those 80-90% of customers who buy little, demand unfeasibly low prices, and demoralize staff and other customers are treated similarly to those customers that are loyal, long-standing and enthusiastic ones who pay the full price, recommend products to friends, and improve the morale of the company’s best employees.
According to Richard Koch (and me), this happens mainly because most leaders believe the world is 50/50. They think that results flow from causes in a linear and roughly equal way. They confuse revenue with profits. They think in averages.
They don’t understand that one customer, one product, one product feature, or one business segment is not as good as another. This leads to dwindling margins and cash ironically leading to the acquisition of more profitless customers thus compounding the problem.
It is time to flip the script!
Doing a profit analysis of your existing customer base can yield outsized results. I share one way to do this in this post from a few years ago.
If you or someone you know is overwhelmed by the sheer volume of work or feels controlled by outside forces that are preventing success, please reach out to me (contact info below).
Bill – Certified Growth Coach, Foundations in NeuroLeadership certified, PI Certified Partner, 100COACHES member coach
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