The Pareto principle of 80/20 states that the distribution of effort does not evenly match the returns. The term was coined by the Italian economist Vilfredo Pareto in 1896 in reference to land ownership in Italy – at the time, 80 percent of the land was in the hands of 20 percent of the population.

Nowadays, this ‘law of the vital few’ is commonly applied to business. Roughly put, 80 percent of your revenue comes from 20 percent of your customers.

However, too few sales strategies draw a distinction between these low and high value customers. The lower 80 percent may generate small, short-term sales spikes but ultimately, it can eat away at the profitability of your business.

For your business to enjoy long-term growth it needs to identify its 20 percent of most valuable customers and focus on them. If you don’t do this, your low-value customers could kill your business.

Know your big spenders

Like most companies, you have a few big accounts that are responsible for a large portion of your business revenue. These key customers are precious goldmines and understandably will command more of your attention.

You need to know who these top 20%-ers are and understand their buying behaviour. When do they place orders? Do their orders ever change according to seasonal shifts? Do they respond to up-or cross-selling opportunities?

You need to learn your big spenders’ spending habits to know which customers bring true value to your business. Armed with a profile of this lucrative group, you’ll be able to identify prospective business opportunities of a similar ilk – as well as avoid the low-paying, high-maintenance, time-wasting customers.

It's a good idea to identify your high-rollers

Spot the low value customers

Low value customers are bargain hunters. They are always looking for a deal or a discount and only buy cheaper goods with a low profit margin. They love to haggle over cost and try to negotiate prices down even further.

At the same time, they’re incredibly high-maintenance and flighty. Salespeople and customer service teams waste an inordinate amount of valuable time trying to reach them and meet their demands – with very little return.

If your company typically sells low value items, then it will inevitably attract low value customers who will use up most of your salespeople’s time. You need to carefully consider how much money you are spending on marketing to raise brand awareness in a market that only attracts low-value or one time buyers.

Low value customers don’t generate nearly enough gross profit in comparison to the amount of time your team spends on servicing these accounts.

When you consider that on average, these low value customers spend five times less than your top 20 percent, you have to decide now whether or not you have the channels and resources to support the needy 80 percent. It often makes more sense to reward your loyal high-value customer base with special offers spread out over a longer period of time.

Avoid the bargain hunters

There are a few processes to help your business steer clear of the low value customers. The most extreme solution is ‘customer divestment’ and this should only be considered as a last resort.

While customer retention will always be a vital element in any sales strategy, there are times when a company needs to stop providing their product or service to certain customers if they’re costing them more than they’re worth.

Grade your customers to make sure that you are retaining the right kind of customers, not just any kind. Too much worth is placed on quantity instead of quality these days.

Bargain hunters aren't great for profit margins

You need to know which customers are causing the least grief and generating the most profit, and which are having a detrimental impact on your bottom line. That way you can allocate support and services with utmost efficiency.

Before you divest a low value customer completely, assess your relationship with them and review their past spending habits by looking at the data. Perhaps there is an opportunity to present an exclusive up- or cross-selling offer to them? Sometimes a simple incentive is all it takes to encourage small spenders to spend more.

Take time to evaluate new markets and analyse their potential to attract high value, long-term customers. Look at the costs of opening a new branch versus keeping an existing one open.

Work out how much it would cost to advertise in the new area and be sure to consider your competitors’ activity in the vicinity. To get a true handle on the potential profitability of a new enterprise in a new location, do some short-term testing with a low-risk pop-up store.

If your sales team is pandering to the petty needs of the same customers over and over again, it’s time to step back and evaluate why and if they’re really worth it. It’s important to identify the common complaints of high maintenance customers, and go the extra mile to solve them.

Delighting your customers with a proactive and positive experience can turn apathetic customers into loyal ones. With a bit of time you may even uncover several new ways to improve your customer service as a whole and reduce the number of customer complaints significantly.

That said, if a relationship with a low value customer gets really bad and is completely unsalvageable, don’t think twice about walking away.

Holding onto these customers will damage your company’s reputation and team morale, and put your business at risk. Always keep tabs on your customer data and use it to identify the valuable high return accounts. As soon as you know who your top 20 percent customers are – give them 100 percent of your time.