Hi there!
My website offers low cost professional support services to the small business by telehone and email and I asked one of my clients to do a customer analysis. Her email reply expressed concern: "Tom, I'm shocked. Nearly 80% of my sales are coming from only 20% of my customers". "Don't be shocked", I fired back, "that's exactly what I wanted to hear".
When you analyze your customer base you should find a similar ratio. Let's say you have 1000 customers and sales of $1M; 200 customers should be providing $800K, while the other 800 will give you the remaining $200K.
This is called the "Pareto Rule", which says that 80% of the output of anything will come from 20% of the input. And it really does work in business situations.
What's the significance if you find that it doesn't apply to your customer base?
Let's say that 10% of your customers provide 80% of sales. This means that you're over-reliant on too few customers. This is a warning sign. It makes your business vulernable in the event that you lose one or two of these customers. So, you must take action to bring the ratio back into balance.
On the other hand, let's say it goes the other way and that 80% of your sales come from 30% (or more) of your customers. This is also bad news. It means that you're having to deal with too many small customers. And this pushes up your costs. Remember: it often costs as much to service a large customer as it does a small one. So, a ratio of this nature hits your profits.
Why not consider abandoning the 80% who only give you 20% of sales? Don't bother. The Pareto rule will still kick-in, so where do you stop. Anyway, a small customer today could become a large one tomorrow.
One more point I would make about your customer analysis. If you find that any single customer gives you more than 20% of your sales, beware. This is unhealthy as it means you could be in serious trouble if that customer stops buying from you. And the higher the proportion of your sales he has, the greater the danger you are in.
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