As an entrepreneur you depend on your customer base. Thanks to a Customer Pyramid you can map your customer base. A must since it gives you a clear overview of your customers and the extent to which they contribute to your sales volume. And the additional benefit? Aided by this data you can determine the right marketing strategy per customer group… so let’s start!
1. What is a Customer Pyramid?
A Customer Pyramid shows who your customers are and to what extent they contribute to your turnover.
2. How did the Customer Pyramid start?
Jay Curry’s Customer Pyramid is based on the so-called ‘Pareto Principle’, an economic rule of the Italian economist Vilfredo Pareto which is popularly referred to as the 80-20 rule. Why? Because Pareto stated in the early 20th century that 80% of the Italian possessions are owned by 20% of the Italian population.
American businessman Josep Juran elaborated on this and noticed that the 80-20 rule applies to more. For example: 20% of the children in a classroom cause 80% of the noise. In other words: 80% of the effects are caused by 20% of the causes. Jay Curry, in turn, applied this rule to customers versus entrepreneurs. In short: his pyramid ranks customers by turnover.
3. What does the customer pyramid look like?
According to the Customer Pyramid, 20% of your customers account for 80% of your turnover. So: 1% of the 20% belongs to the top customers, 4% to the large customers and 15% to the medium-sized customers.
The 20% group can be divided into:
– The 1% top customers, also known as A customers, account for 40% of the turnover.
– The 4% large customers, also known as B customers, account for 25% of the turnover.
– The 15% medium-sized customers, also known as C customers, account for 15% of the turnover.
The other 80% can be divided into:
– Small customers who make sporadic purchases.
– Inactive customers who’ve purchases, but not anymore.
– Prospects that meet the customer profile, but that you haven’t done business with until now.
– Suspects that aren’t familiar with your product (s) and/or service (s).
4. How do I deploy a Customer Pyramid?
The Customer Pyramid can be used to map your customer base and determine the correct marketing strategy for each group. Based on that, you can take next steps; do you focus on the 20% regular customers or are you going to bring the 80% group to the top?
Curry’s theory is also regularly criticized as the customer pyramid is revenue-based while others believe customer profitability may be more important: a one-time purchase from a customer may lead to high turnover even though the same customer doesn’t make repeatedly purchases. Something to think about…
Note: The Customer Pyramid doesn’t apply to every business (or revenue model). After all, every business is different and the percentages can differ.
Tip: Price agreements are regularly made with large customers because higher purchase leads to discounts. As a result you’ll achieve a high turnover, but also a lower profit margin. Find out for yourself what works best for your company!
5. How do I determine an appropriate Marketing Strategy?
The first step in determining an appropriate Marketing Strategy is by mapping out your customer base and knowing which group your customers belong to. And yes, you do that through the Customer Pyramid. Hereafter, according to Curry, five strategies can be applied to these groups. In the next blog we’ll discuss these strategies. For now… let’s stat with the Customer Pyramid!