Make More From Every Customer 80/20 Economics
This is the most critical aspect of marketing, because you can have the best customer list in the world and best sales pitch in the world, but if your pricing strategy is lousy you’ll still go broke. If your economics are bad, that means you’re taping dollar bills to every product that gets shipped out the door. Better marketing only hastens your trip to bankruptcy court. And please understand, the money you get is only half the equation. The other half of the equation is even more important: How much value does the customer get? “Economics” is about both these things. It’s central. Economics should always be the starting point of any marketing conversation. Especially if you’re searching for a breakthrough and not just a minor improvement.
The first thing to understand about economics is it’s 80/20 all the way up and down. If we line up 100 customers from least able to buy to most able to buy, AND least tempted by your proposition to most tempted, HERE, in Figure 12–1, is how they stack up:
A lot of people assume their customers are all roughly equal. They are not—not even close! That’s the 80/20 Power Curve in action. This example assumes the average customer spends $100, and you collected a total of $10,000. Here you see the least interested person wants to spend $27. The most interested person will spend $1,426 (notice he’s way past the top of the chart). So the most interested person will spend 50 times more money than the least interested one.
It’s also interesting to notice the people who actually spend the average amount, which is $100, are people near the “top 20 percent” mark. In other words—only 20 percent of these customers represent a serious opportunity for you. Handy rule of thumb: 80/20 says that 20 percent of the people will spend 4 times the money. It also says that 4 percent of the people will spend 16 times the money. Memorize this—it’s one of the most powerful facts you could ever know about business.
OK, So How Do You Use This Information? The Power Curve shows you why McDonald’s always sells small, medium, and large drinks. It’s because peoples’ capacity to consume varies widely. As you’ll see in a minute, though, $1.00 for small, $1.40 for medium and $1.85 for large barely scratches the surface of peoples’ true differences. But most important, the Power Curve shows you the almost limitless capacity of the top 1 percent. Which brings us to . . .
The Principle of the $2,700 Espresso Machine Let’s say 1,000 people walk into a Starbucks shop today. The least anyone will spend is $1.40 for a “Tall” Coffee of the Day. Let’s plug those numbers into the Power Curve and see what it tells us. One thousand visitors means 1,000 members. The 1,000th member (the lowest-spending person in the lineup) spent $1.40. We enter the data like this at http://www.8020curve.com, in Figure 12–2 (page 94). The graph it gives us is shown in Figure 12–3 on page 94. When you click on “Examine a range of members,” you can check up on Member Number One—your top-spending customer. The tool predicts the customer wants to spend $537 at Starbucks today. How does a person spend $537 at Starbucks? Do they buy 100 lattes? No. They buy three lattes, two blueberry scones, and one espresso machine! As I’m writing this, Starbucks’ website features two espresso machines, shown in Figure 12–4, page 95. Hey man—not only can you go home with a $275 espresso machine in hand, if you’re feeling really ambitious, you can part with $2,699.95 and carry 45 pounds of stainless-steel coffee-making pleasure with you.
Starbucks’ 10X spread between the ordinary machine and the extraordinary machine is no accident, by the way. Them folks at Starbucks ain’t dumb. They understand Power Laws. (Just think, if you give your mother-in-law the Musica Lux unit for Christmas, and she uses it 10 times, it only costs you $269 per cup of espresso.) Joking aside, the Espresso Machine Principle is a paramount strategy of successful business. Yes, you can always find companies that ignore it. But most of them aren’t doing well, and the Power Curve virtually guarantees you that they are leaving money on the table. Hotels have $1,200-per-night suites on the top floor. Airlines have red carpet clubs for their top 20 percent customers. International flights offer $10,000 first-class seats and $20,000 luxury sleeping pods. For the airline, that sure is nice compared to getting $385 for a seat in coach. The book Whale Hunt in the Desert by Deke Castleman describes how Vegas casinos get 20 percent of their income from a super-elite class of gamblers called “Whales.” Whales fly in on private jets and bet $100,000 on a single round of blackjack. Casinos lavish Whales with dedicated staff,
Musica Lux by Nuova Simonelli $2,699.95
Aroma Espresso Machine by Saeco $275.00
perks, amenities, and high-end luxuries that are utterly invisible to every other guest in the hotel. 80/20 doesn’t just work in Vegas. A tiny $1-million charity will most likely get $100,000 of its donations from one single trust, foundation, or individual donor. A $200,000 per year one-man tax practice can and should get $20,000 of business from a single customer. Mr. Smith’s restaurant in Washington, DC, is “Home of the $1,000 Hamburger.” Yes, they really do sell a hamburger for $1,000. (Their website insists it’s really good.) This is not merely about selling to the affluent, or conspicuous consumption, though you should never ignore either of those things. That’s because the Espresso Machine Principle applies to all aspects of product and service sales: • How much the unit costs. • How often they come back and buy more. One espresso machine buyer in 50 will buy another one every week. (Probably not at Starbucks, but they’ll buy it somewhere.) • How many units they buy at one time. One espresso machine buyer in 50 is gonna want 100 units all at once. • People who buy units in quantity, and often. One espresso machine buyer in 2,500 will want 100 units every week.
The Power Curve Is Multi-Dimensional When you look at all your past buyers, the Power Curve applies to: Repeat buys: Of the people who buy more than once, 20 percent of them are responsible for 80 percent of the repeat purchases. Money: 80 percent of the overall money comes from 20 percent of the buyers. Quantity: How many units of a specific product bought at one time is on the Power Curve. 20 percent of the orders represent 80 percent of the quantity. Diversity: How many different types of products they buy at any one time is on the Power Curve. Twenty percent of the orders represent 80 percent of the diversity.
THE MAN WHO TRIPLED HIS BUSINESS IN FOUR MONTHS WITH 80/20
Joshua Boswell, a freelance copywriter, came to a Four Man Intensive, one of my private workshops in February. I gave him an explanation of the Espresso Machine Principle and how it flows from 80/20.
Suddenly—he saw it. His brain lit on fire. He saw where a whole bunch of money was lying on the table. He understood exactly what he needed to do. And the first thing on the list was creating a new, high-end, “Espresso Machine” type offer for his client.
His client sold online training courses for currency traders. At the time, their most expensive product was a $500 set of manuals and DVDs that walked customers through a series of strategies for succeeding in that business. I showed him that if he could deliver the same thing in a more valuable way, he could pick up a large number of sales at a $2,000 to $3,000 price point.
The number-one thing his client was missing was hands-on help. Joshua transformed run-of-the-mill distance learning into hands-on mentoring. He organized a combination of one-on-one, look-over-shoulder guidance and small-group orientation sessions that tremendously increased the personal touch that students experienced.
In May he sent me this report:
Here are some basic dollar growth numbers for our business this year:
Month Orders Gross Revenue
January 396 $25,440.35
February 459 $29,365.90
March 684 $53,953.92
April 945 $76,847.40
Grand Total: 2,484 orders; $185,607.57.
Now, these following numbers are even more exciting to me. Look at the average amount our customers spend, per order: continued
What this means is that if all you sell is scones and cups of coffee ranging from $1 to $5, your business is probably doomed. And if it’s not doomed, you’re destined to earn a meager living and barely scrape by. The principle of the $2,700 espresso machine applies to almost anything you might choose to sell. If your website just sells one book or one wedding candle or one exercise band for $29, you’re leaving buckets of money on the table. Because if you just scratch one narrow itch on some super-specific topic, the intensity of that itch and the propensity to spend money to scratch it is easily 100:1. Selling that one book was merely a way to attract a long-term customer. That means you can add a $290 product and a $2900 product, and you’ll probably double your sales. If you have thousands of customers, the spread will be even wider. Many businesses do not have product offerings spanning a 100:1 range, so they’re missing all kinds of opportunities to sell to their existing customers. When you take full advantage of this, your sales and profits immediately go up, making it much easier for you to go get more customers. You can advertise more, bid more for clicks, promote yourself in more media channels, pay more for leads.
THE MAN WHO TRIPLED HIS BUSINESS IN FOUR MONTHS WITH 80/20, CONTINUED
Not only did our orders go up, but their average value increased as well. How cool is that? We added one quick upsell, and that made the difference.
Oh, and did I mention that we are only just starting?
Deliver Value Obviously, you can’t sell the same cup of coffee for $1 to some people and $10 to others in the same place at the same time. (Not usually anyway.) But the point of the Power Curve is if coffee is the itch, the range of expense they’ll go to scratch it is huge. The initial $1 cup of coffee is a rack-theshotgun exercise. The 80/20 principle says that if 10 people will pay $1 for a cup of coffee, two of the 10 will pay $4 for a better cup of coffee. As long as the superior cup of coffee is perceived as being “just as good of a deal” as the ordinary one, you can be reasonably certain that those two will step up to the plate and spend the extra money. The core question people ask when they pay money is: “What problem can you solve that nobody else can solve?” Starbucks famously addressed this question by utterly transforming the coffee experience. The concept of a gourmet coffee in a luxury environment with exquisitely appointed decorations and aromas—cappuccinos and lattes and jazz—all that was very strange when Starbucks set out to make their cup of coffee “the $3 luxury that almost everyone can afford.” That’s their USP. Many have forgotten that in the 1980s, coffee was an uninspiring brown beverage that cost 65 cents, served in a Styrofoam™ cup with a packet of sugar with some chalky powder that people insultingly called “creamer.” Any business can be transformed the way Starbucks transformed coffee. It doesn’t matter if it’s insurance, or metal stampings, or jet airplanes; a “gourmet” version is always possible. This can transform the entire industry. Starbucks completely changed the very idea of coffee and inspired thousands of imitators.
————————————————— PARETO SUMMARY —————————————————— p At any given price point, 20 percent of the people will spend four times the money. p The Power Curve (www.8020curve.com) shows you the “propensity to buy” in your customer base, even if you have data on only one single product.
p The Espresso Machine Principle says that a business based on many small transactions can make just as much money from a few large transactions. p Most businesses are leaving all kinds of money on the table, and the Power Curve shows you where it is.