Small Businesses Should Avoid These Customers at All Costs
The 80/20 rule says that 80 percent of your revenue will come from 20 percent of your customers, which means the majority of your customers are taxing your company's finite resources while providing you very little in return. It also means your success (or failure) will depend highly on a very small percentage of your client base.
If you are contemplating starting a new business or need to pivot an existing one, the strategy you use to target potential clients should extract the most amount of revenue from the largest percentage of your customers. This can be achieved by catering to the two ends of the marketplace and largely ignoring the middle.
Volume and Margins
On the upper end are customers who require a high level of service or product quality -- and are willing to pay up for it. They are low-volume but high-margin transactions. For services, think Virgin Atlantic; and with products, think Beats by Dre.
%VIRTUAL-pullquote-The demographic you absolutely want to avoid is that big, fat middle of the market.%At the low end of the spectrum are customers who want the best value for their money (read: cheap), but are willing to forego special services or even average quality. These are low-margin but high-volume transactions. For services, think Southwest Air. With products, think those $4.99 ear buds you bought at truck stop on a cross country trip.
A small business can do very well sticking to either segment because the ratio of customer imposition to profit margin aligns. Virgin Atlantic may only take you to Europe once every five years, but it will pamper you and charge you a premium for it. Southwest, on the other hand, might transport you around the country five times a year for business with cut-rate, no-frills flights.
The demographic you absolutely want to avoid is that big, fat middle of the market -– the customers who want the service and quality of the upper end, but with the cheap price of the lower end.
Of course that is where most of the customers are, because who doesn't want to get more for less? But that is also where you will find most of your competitors slugging it out, over-promising while eroding their profit margins. And when the economy gets tough, this segment contracts the most, leaving even less fish for sharks to fight over.
The extremes of the market are more resilient because at the higher end, customers with means are less likely to be affected by bad economic times, and at the lower end, discounted pricing attracts budget-conscious consumers.
The Sweet Spot for a Successful Bakery
Say you were considering opening a bakery. At the high end, you could create a patisserie, with French-trained staff, a prime location and a designer brand. This would allow you to target elite customers who would pay a premium for your pastries. High margin, low volume.
%VIRTUAL-article-sponsoredlinks%On the low end you could open a doughnut shop. The overnight crew of unskilled cooks, in a low-key location, could bang out the standard selection of inexpensive treats that would sell out before noon. Low margin, high volume.
But whatever you do, don't open a French bakery that charges doughnut shop prices.
As a small business owner, it is important to understand that a "one-size-fits-all" approach to customers rarely makes economic sense, and sometimes you have to challenge conventional wisdom to ensure your business is a success.
Brian Lund's blog offers more on small business, the stock market, investing and the secret to eternal life.