Profits and the Pareto Principle
By Perry Marshall
Young people will be excused if they can only think of coffee in terms of decadent delights, indie folk music, and décor meant to satisfy the hipster’s eye. The rest of us might recall an altogether different sort of caffeine related experience: that antiquated greasy spoon on a nearby highway, where those who hauled truck for a living could be found every morning, and where noting that the java on a given day was “good” was really something to marvel at.
We all know it was Starbucks that flipped that paradigm on its head, making assorted caffeinated beverages a luxurious (and hugely profitable) commodity. So how do we follow suit and earn disproportionate profits from high-end customers?
The answer is, quite plainly, in the math. The Pareto Principle—more commonly known in business circles as 80/20—states that 80% of a company’s profits come from but 20% of its total customers. The 80% are the casual consumers who could take or leave your product, and can’t really be relied upon for repeat business. The other 20% are a different matter entirely; passionate about your wares, they can’t imagine living without them, and are willing to part with decent sums of money to keep the good stuff coming.
What’s more, this all-pervasive law of 80/20 is exponential. That is to say, within that core 20% of faithful customers, 20% of those are absolute fanatics. They are your brand’s most zealous grass-roots advocates, and might well jump through rings of fire for you.
Let’s again use Starbuck as an example, as they are, in this regard, quite exemplary. For those still in search of a plain, no-frills cup of Joe, that old greasy spoon is still just a short drive away. In other words, by offering a gourmet experience at a slightly higher price, Starbucks has already eliminated the least profitable segment—roughly 80%–of potential customers before they’ve even entered the door.
Again, this clever marketing strategy, like the math upon which it’s based, works exponentially. We can be certain that those who frequent Starbuck have both an appetite for pumpkin lattes, as well as the money to pay for it. 20% of those reliable customers are quite likely to be spellbound by high-end coffee beverages, and have a great deal more money to spend on their obsession.
Like any keen business, Starbucks is entirely prepared to cater to these fervent few. What true caffeine junkie with holes burning in his pockets wouldn’t love to bring the experience home with an espresso maker? Starbucks has got that and then some. For just under $300—think of that as one hundred customers each buying a single $3 drink—the genuinely dedicated can bring Saeco’s Aroma Espresso Machine.
But that’s all kid’s stuff to coffee aficionados, and chump change compared to the whale of espresso makers. Starbucks has at the ready Nuova Simonelli’s Musica Lux, the highest of the high-end. At a bit under $3,000, the Musica Lux can move as much in one shot as one thousand customers each buying one beverage. And yes, within that 20% of 20%, you can count on yet another 20% segment of hugely wealthy consumers who would just about lie down and die for a premium espresso.
How does your business stack up? Are you content to plug away selling endless amounts of relatively inexpensive items, or is there an upper tier of consumers you could be catering to? The law of 80/20 assures us that there is indeed a high-end bracket of customers that can help you earn a disproportionate amount of profits. Zero in on your company’s most faithful buyers, and offer them something a bit higher on the shelf. Rather than perpetual toiling for a relative pittance, you can make a small fortune with one brief, big kill.
Get Perry’s new book “80/20 Sales & Marketing” at a very very special price: http://www.perrymarshall.com/8020/