Wouldn’t it be great if every person in the world bought your product or service? All you have to do is create something that everyone wants, right?
I hate to break it to you, but you’ll never be able to create a product or service that pleases everyone. If you try, more likely than not, all you’ll be doing is setting yourself up for failure.
The 80/20 Rule aka The Pareto Principle
Have you heard of the 80/20 rule? It’s a saying that’s used heavily in the business world. It goes something like this:
80% of your sales come from 20% of your clients.
It can also mean 80% of your revenues come from 20% of your customers.
Now, granted, the 80/20 Rule is just a rule, so the percentages won’t always match exactly, but chances are they will be close.
Your takeaway: don’t waste your time trying to please the largest group of customers that are likely to be only producing a small fraction of your revenue.
The Crazy Egg Case Study
Don’t believe in the 80/20 rule yet? Well, here is what I learned the hard way…
When we first launched Crazy Egg we had 3 paid plans: $99 a month, $49 a month, and $19 a month. Within a few months, a lot of potential customers said that they would be happy it if we would add a $9 a month plan. So we just did it without thinking of the implications.
After a few years and thousands of customers, here is the breakdown of customers by plan:
- 6% of our customers are on the $99 a month plan.
- 10.4% of our customers are on the $49 a month plan.
- 23.9% of our customers are on the $19 a month plan.
- 59.7% of our customers are on the $9 a month plan.
Additionally, here is a break down of Crazy Egg’s percentage of revenue per plan:
- 6% of our customers account for 28.6% of our revenue ($99 a month plan).
- 10.4% of our customers account for 24.2% of our revenue ($49 a month plan).
- 23.9% of our customers account for 21.6% of our revenue ($19 a month plan).
- 59.7% of our customers account for 25.6% of our revenue ($9 a month plan).
Looking at the data from the top 3 plans, it turns out that 40.3% of our customers make up 74.4% of our revenue. Whereas, the $9 plan makes up 59.7% of our customers and only 25.6% of our revenue.
So in our case, the 80/20 rule was actually 75/40. Where 75% of our revenue is produced by 40% of our customers.
For example let’s say there are 100 customers and the total revenue is $10,000 per month. Then 40 customers would be on the higher plans, which produces $7500 and 60 customers are on the lowest plan bringing in $2500.
Although it seems like adding the $9 brings in an extra $2500, it actually probably wasn’t the best thing to do…..
We noticed once we added the $9 plan, we started getting more tech support requests. Customers who typically pay us $49 and $99 tend to have less questions and are usually more satisfied with our product. On the other hand, customers on the $9 plan tend to ask a more questions and generally aren’t as satisfied as the higher paying customers.
In hindsight it would have been better off for us to focus on that 40% of customers that bring in 75% of revenue. We could have done this by trying to understand more about this segment of our customers.
What types of companies do they represent? What is their job title? What do they all have in common? What makes them different than the 60% of customers on the $9 plan?
Going forward, our plan is to start understanding our most profitable customer segment(s) better in an effort to get more of these types of customers.
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