It’s an old axiom that 20% of your customers will produce 80% of your sales. Turns out, it’s true. The trick is figuring out which 20% is the right 20%. But once you’ve gone through the exercise, you can precisely focus your marketing strategy based on what each data segment is telling you. Each segment will yield a secret that tells you which customers are worth retaining, which ones you should try to win back, which customers are worth cultivating, where to prioritize your marketing spend, and who’s actually costing you money to keep.

1. Do You Really Know Who Your Best
Customers Are?
A simple, highly effective way to generate higher
ROI through the magic of the 80/20 rule
By Steve Khederian, Director of Analytics, Catalyst
Page 1 Copyright ©2011 Catalyst. All rights reserved.

2. Do you really know who your best customers are?
B ack in 1945, George Orwell wrote in Animal Farm, “All animals are equal
but some animals are more equal than others.” As marketers, we know that all
customers are not created equal. We should be able to generate higher ROI by
segmenting customers properly so we can target higher-value propositions to
higher-value segments and improve our communications strategy.
So why don’t we?
I’m frequently amazed by the number of relatively sophisticated marketers who
haven’t properly segmented their customers. I’m convinced this occurs for two
reasons:
1. Many marketers believe they already know who their best customers are.
This group is usually quite surprised to find out otherwise. Proper segmentation
can be a humbling experience.
2. Many marketers overcomplicate the process. The wide range of analytics
tools and processes at our disposal, coupled with the expectation to come
up with new and better solutions, often drives the temptation to create
complexity. As a result, one of the biggest challenges—and opportunities—with
segmentation is starting simple.
Let me introduce you to a reliable, effective way to start simple: the 80/20 rule.
The 80/20 rule: how to measure and determine customer value by segment
It’s an old axiom that 20% of your customers will produce 80% of your sales. Turns
out, it’s true. The trick is figuring out which 20% is the right 20%. But once you’ve
gone through the exercise, you can precisely focus your marketing strategy based
on what each data segment is telling you. Each segment will yield a secret that tells
you which customers are worth retaining, which ones you should try to win back,
which customers are worth cultivating, where to prioritize your marketing spend, and
who’s actually costing you money to keep.
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Page 2 Copyright ©2011 Catalyst. All rights reserved.

3. Do you really know who your best customers are?
Here’s how to start.
1. First, determine your value segments based on whatever criteria drive your
business: for example, sales, margin dollars or unit volume.
2. Now, rank your customers from highest value to lowest value for the most recent
12-month period.* The customers who produced 80% of total value are your
High Value segment. The balance is Low Value.
3. Now, do the same thing for the previous 12-month period and you will have High
and Low Value segments from last year and this year.
You’ll also have new customers who had zero value in the first year but are now
on the books as High or Low Value customers. Likewise, you’ll have lost High
and Low Value customers from the first year who had zero sales in the most
recent year.
A simple cross-tab of these dimensions is likely to show significant movement from
one segment to another for each year. Here’s a typical distribution of the 24-month
customer snapshot.
Segmentation—Current Value and Retention Trends Year over Year
Year 1 Value Year 2 Value Segment
Values Total
Segment High Low None
Dealer Customer IDs Count 800 500 200 1,500
High Total Year 1 Sales $4,600,000 $900,000 $700,000 $6,200,000
For each of Total Year 2 Sales $5,400,000 $500,000 $0 $5,900,000
these segments, Dealer Customer IDs Count 300 2,700 1,800 4,800
ask yourself: Low Total Year 1 Sales $300,000 $1,000,000 $500,000 $1,800,000
Total Year 2 Sales $1,000,000 $900,000 $0 $1,900,000
What happened? Dealer Customer IDs Count 300 1,400 1,700
Why? None Total Year 1 Sales $0 $0 $0
Total Year 2 Sales $1,600,000 $600,000 $2,200,000
Total Dealer Customer IDs Count 1,400 4,600 2,000 8,000
Total Year 1 Sales $4,900,000 $1,900,000 $1,200,000 $8,000,000
Total Year 2 Sales $8,000,000 $2,000,000 $0 $10,000,000
*This same approach can be taken using the last 90 days vs. the previous 90 days,
or any other time frame that makes sense for your customers’ buying cycle.
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Page 3 Copyright ©2011 Catalyst. All rights reserved.

4. Do you really know who your best customers are?
Tracking movement across value segments from
one time period to the next defines specific targeting
opportunities and prioritization of value.
Each of these segments presents opportunities to impact customer behavior and
grow ROI if you understand what happened and why, if only broadly. For each
segment, what you’re looking to learn is, “what can I do to move you forward?”
Your goal is to drive customers into higher value segments.
For example, what can you learn about the customers who moved from Low to High
to better determine marketing spend for those who remained Low? Looking at the
customers who moved from High to Low, how might you proactively avoid value loss
next year among High Value customers?
Once you understand what each segment tells you (the data), your job is to ask
“what happened?” and “why?” (the analysis). Each intersection in the matrix begs
important but often overlooked questions—the answers to which should shape
marketing and sales strategies to prioritize marketing spend, drive growth, minimize
attrition and churn, and improve ROI.
What other secrets can you find hidden in your data? How about customers who
should be marketed to less frequently, customers who shouldn’t be marketed to
at all, lost customers to target for win-back, and clues to develop a more effective
acquisition strategy. And the good news is, you don’t have to choose between these
objectives. You can do them all, and you should. But the 80/20 segmentation matrix
will clearly illuminate your “red flags” so you know where to focus first.
We’d be happy to talk to you further about doing a segmentation analysis of
your data. For more information contact Diane Quinlisk at 585.453.8313 or email
dquinlisk@catalystinc.com.
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Page 4 Copyright ©2011 Catalyst. All rights reserved.

5. Do you really know who your best customers are?
About the author
Steve Khederian is director of analytics at Catalyst, a Rochester, NY-based direct and digital marketing
agency, where he specializes in applying data to develop and implement integrated, multichannel sales
and marketing programs. He is the former CMO of Modern Marketing Concepts and VP of client services at
Concentrix. He holds an MBA from the Simon School of Business at the University of Rochester.
110 Marina Drive
Rochester, NY 14626
800.836.7720
www.catalystinc.com
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