Have you heard about the 80/20 rule of customer relationship management (CRM)? Many vendors and consultants are using this rule as a popular sales pitch, touting it as the success strategy for businesses seeking out a CRM solution. Patricia Czech examines how the 80/20 rule works in business and what it means for CRM.
The 80/20 rule states that 20% of customers drive 80% of your business. The idea is that applying the rule to such CRM applications as data mining, campaign management, and sales force automation will help your business identify your best customers — the 20% segment.
In this article, I'll explain the origins of the 80/20 rule, tell you why some economists disagree with this principle, and argue that it would be harmful to apply it to a CRM strategy.
A POPULAR RULE
The 80/20 rule doesn't apply only to CRM applications, but to a variety of business and management situations. Here are a few examples:
- 80% of your profit comes from 20% of your customers;
- 80% of customer service problems come from 20% of customers;
- 80% of human resource problems come from 20% of employees;
- 80% of your results will come from 20% of your effort; and
- 80% of a manager's time is spent pushing papers, while 20% is spent actually managing.
The list of examples to which “80% of X means 20% of Y” applies is virtually endless.
In an article, “Writing Off 80 Percent of Customers Is Economics Gone Berserk,” published by American Banker financial expert Jerry Weiner warns, “At some point, forcing unprofitable customers away would result in the loss of more incremental revenue than expenses.”
As for losing revenue, CRM applications also promise to take that 80% of “unprofitable customers” and turn them into customers who actually open their pocketbooks. But how is this possible if you focus all your energy in sales and marketing on the top 20%?
A more realistic theory behind CRM is that not every customer will be a highly profitable piece of your business, or respond favorably to marketing campaigns. CRM applications are not a set of magical end-to-end business solutions.
So if you're feeling pressured to buy from a vendor or an application service provider telling you their product will create an 80/20 win-win situation for your business, ask them about Wilfredo Pareto, the 19th century sociologist and economist who created the 80-20 Rule.