Management Articles


 

Top Market Strategy: Target the Best and Ignore the Rest

By: Dr. Elizabeth Rush Kruger

Dr. Elizabeth (Betsy) Rush Kruger is a widely recognized and respected authority in marketing. Beginning with the University of Chicago in 1978, she built her reputation by managing marketing projects for leading corporations in many industries.  After years of hands-on experience, Dr. Kruger developed and sold innovative software in over forty countries.  She has taught thousands of business students many insider secrets about marketing research, international marketing, promotion, and marketing strategy. The author confirmed two classic theories with worldwide data: Abraham Maslow's Hierarchy of Needs and David Ricardo's Comparative Advantage. Dr. Kruger maintains an active speaking and consulting practice. The Better Business Bureau accredited her business, Strategic Power.

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Top Market Strategy: Target the Best and Ignore the Rest



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Strategic Analysis of Market Segments

Strategic Analysis of Typical Market Segments
Figure 1: Strategic Analysis of Typical
Market Segments

Is your business strategy targeting your best market segment? Let's analyze how much the Top Market Strategy will multiply your sales and profit. You see, we are all created equal, but some prospects are more "equal" than others. If your business is typical, prospects in the top 20% will produce 16 times more sales and profit than other market segments. Do you want to predict who is in your top market segment? Learn how a universal principle governs your sales and profit.

How to Multiply Your Sales

Salespeople readily see that many of their sales come from a few customers, but the most successful salespeople analyze how the 80:20 rule of thumb works with their customers. When sales people segment their market by sales, they discover that 80% of their sales come from customers in the top 20%, whereas 20% of sales come from customers in the bottom 80%. Does this seem true for customers of your business?  If your business is typical, this result must be true since the 80:20 rule is an application of Pareto's universal principle. Figure 1 analyzes the sales of two market segments of a typical business:

  1. The vivid blue market segment shows that customers in the top 20% buy 4 times more than expected. 
  2. The pastel blue market segment shows that customers in the bottom 80% buy 1/4 as much as expected.

According to this universal principle, we can analyze the sales of these two market segments by dividing 4 by 1/4. From this analysis, we can predicts that in your business the top 20% of your customers buy 16 times more than the bottom 80% of your customers.

Strategic Analysis of New Market Segments
Figure 2: Strategic Analysis of New
Market Segments
Do you want to quadruple your sales? Of course, you do! When your sales strategy targets your best market segment and ignores the rest, you can quadruple your sales. Figure 2 is a strategic analysis of market segments in a typical business. You can see how to use this principle to quadruple your sales.

Based upon this analysis, you should use this sales strategy:

  1. On 1 day a week, target customers in the top 20% and ignore the rest. You will make 80% of your usual weekly sales since customers in this market segment buy 4 times more than expected.
  2. On the other 4 days, convert top prospects into top customers. These new customers will buy 16 times more than customers in your bottom market segment.
  3. Replace customers in your bottom market segment with new customers in your top market segment. According to Pareto's principle, when all customers buy 4 times more than expected, your total sales will quadruple.

How to Quadruple Your Profit

Can this principle quadruple your profit from customers? Absolutely! This universal principle also predicts that you will quadruple your profit from customers when you target your best market segment and ignore the rest. This Top Market Strategy works in any business   even yours. Do you want your profit from customers to quadruple?  If so, use these three steps of the Top Market Strategy in your business:

  1. Distinguish customers in the top 20% from your other customers.
  2. Predict which prospects will earn 16 times more profit.
  3. Create marketing strategies for these top customers.

Pareto's 80:20 Distribution
Figure 3: Pareto's 80:20 Distribution
How Pareto's Principle Works

Most successful salespeople recognize that the 80:20 rule works with sales, but does it also work with other applications? Pareto (1896/7) and other researchers have consistently found that input and output data -- in both nature and society - have an 80:20 relationship.  For decades the 80:20 distribution of inputs to outputs has been applied to productivity (Zipf 1949), quality control (Juran 1951), software design (1964), time management (Koch 1998), and many other endeavors. 

Pareto (1896/7) was amazed to discover that a log of this distribution consistently looks like a straight line. More recently, mathematicians (Krugman 1996, Newman 2006, and Adamic 2010) proved that the top 20% of any input eventually generates 80% of the output. This means that you can predict an 80:20 outcome with any large random sample of input and output data.  As shown in Figure 3, Pareto's distribution of inputs and outputs is so skewed that it looks like a broken picture frame.

 

Suppression of Pareto's principle

Without a doubt, Pareto's distribution of inputs to outputs should be as respected as the "bell-shaped" normal curve. Yet leaders suppressed knowledge of this universal principle because Pareto concluded that 20% of households control 80% of the wealth. Leaders felt this outcome was so grossly unfair that they judged his discovery to be immoral. However, Pareto's discovery, like all universal principles, should not be judged immoral or suppressed.  For example, people can die from a bad fall, but is gravity immoral?  Should we suppress knowledge of this "dangerous" principle?  Of course not!  We should neither judge Pareto's discovery as immoral nor suppress knowledge of this universal principle.

Pareto explained, "If the pie is always going to be sliced unevenly, then the best way to help the poor is by enlarging the pie" (Pareto/Powers ed. 1921/1984, 25).  So, instead of suppressing knowledge of Pareto's 80:20 principle, we should harness its power for enlarging the pie. For decades this knowledge has increased productivity, improved quality, simplified software design, managed time, and multiplied sales

 

Profit from Customers in a Typical Business
Figure 4:  Profit from Customers in a
Typical Business
Steps that Enlarge Your Profit

You can learn how to harness Pareto's 80:20 principle to enlarge the profit from your business.  When you implement these eight easy steps in your business, you will quadruple the profit from your customers:

  1. Interview some customers.  Seek an understanding of what makes your customers "tick".  Conduct 7 - 12 in-depth interviews with respondents who represent the diversity of your customers.  Ask probing questions about their buying behavior, interests, and demographics and summarize their responses on each topic.  When their responses become repetitious, you have interviewed enough customers.
  2. Create a short customer survey.  Use the five most popular responses on each topic as response options for questions in the customer survey.  Introduce the survey by stating its sponsor, purpose, importance, and brevity and qualify your respondents.  Motivate them to respond by eliciting suggestions for improvements.  Then ask about their buying behavior and interests, but defer demographic questions to the end of the survey. 
  3. Sample of your customers.  Use your sales records to set quotas on the most important characteristics of your customers.  When these quotas are fulfilled, your respondents will proportionally represent all of your customers.  Survey at least 150 respondents so the responses of this sample will predict the responses the population of your customers. 
  4. Sort respondents by their profitability.  Ask respondents about their purchases and loyalty to your business and multiply them to estimate their potential profitability.  Score each respondent on this index and sort them by their potential profitability.  Categorize the most profitable 20% of your respondents into the top market segment and the other 80% of your respondents into the bottom market segment (Figure 4).
  5. Distinguish customers in the top market segment.  Use percentages or averages to summarize how customers in each market segment respond.  Compare their responses to each question to see whether the responses of the two market segments are significantly different.  Profile the characteristics of customers in the top market segment that distinguish them from other customers.
  6. Select the top market segment as your target market.  Evaluate the top market segment on the seven requirements for a target market.  Are customers in your top market segment (1) identifiable (2) unsatisfied, (3) highly profitable, (4) accessible, (5) uniquely motivated, (6) increasing in demand, and (7) protected from your competitors by a sustainable advantage?  If so, the top market segment as your target market.
  7. Focus your marketing strategies on serving them.  Allocate all of your resources to (1) target your top market segment.  Offer a product/service/idea that satisfies their (2) unmet desire and price the offering to (3) maximize your total profit.  (4) Access them through their favorite media and appeal to their (5) unique purchase motivation.  Ramp up your operations for (6) growing demand and (7) sustain your competitive advantage.
  8. Convert top prospects into top customers.  You can easily convert top prospects into top customers since both are members of the top market segment.  Forecast that these new customers will generate 16 times more profit than customers in the bottom market segment.  When you replace all customers in the bottom market segment with new customers in the top market segment, expect the profit from your customers to quadruple (Figure 5).

 How to Quadruple Your Profit from  Customers
Figure 5:  How to Quadruple Your Profit from Customers

 


© Copyright 2010, Dr. Elizabeth Rush Kruger

Books by Dr. Elizabeth Rush Kruger

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The author assumes full responsibility for the contents of this article and retains all of its property rights. ManagerWise publishes it here with the permission of the author. ManagerWise assumes no responsibility for the article's contents.

 

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