Eighty percent is about the most important number in direct response. Using this number, you can increase your response and sales while lowering your cost per sale. The following will show how valuable 80 percent is to you.
Gold customers (the top 20 percent of your customers) bring in 80 percent of your revenue. These people are really your company. Lose them, and you lose it all. Spend a small amount of money on retaining them and you keep 80 percent of your total business. How does this work?
When you hear people complaining that customer relationship management is too expensive, you will find that they are talking about 100 percent. Suppose you develop a retention program consisting of birthday cards, thank you letters, appreciation e-mails, and special customer services and benefits for certain customers. If you were to do these things for all of your customers, the costs would be quite high. The benefits to you might not pay for the cost of the extra services. But why not concentrate on the gold customers — those who bring in 80 percent of the revenue, but represent only 20 percent of the customers? The cost of a program for gold customers is only one-fifth of a similar program for all customers, but it safeguards 80 percent of your revenue.
Eighty Percent Correct
Your database is a mess. Many of the names and addresses are wrong. Many lack phone numbers or e-mails. Cleaning it up will be costly. But, wait a minute. Why clean it all up? Why not clean up only the easiest portion? Your programmers will tell you that those names can be cleaned up in an afternoon. Getting the remainder correct will take several months. Go ahead and clean up easiest percentage right now. Get it done. Then clean up the remainder at your leisure, in the most inexpensive way possible, or better yet, apply the 80 percent rule to them! What does that mean? Run through the remaining bad addresses to pick out the gold customers. Clean them up. As for the rest, forget them for now.
You want to send out e-mails to your customers. But some of them are on AOL and can only read text. Others can read HTML. Still others want their copies in Spanish. It is a big job, costing a lot of money and resources. Use the 80 percent rule to solve this problem. Pick the easiest 80 percent of your customers and get your message off to them right away. If you have a consumer database, AOL probably represents 80 percent. If it is a business-to-business database, the 80 percent can read HTML. Design your e-mail for the 80 percent and get something done now. If the e-mail is a success, then figure out how to reach the remaining 20 percent. If it is a failure, do not bother with the remainder. Either way, you have kept your costs down.
Building a Data Warehouse
Building a data warehouse has proved to be very expensive for many companies. All large companies that have built one have spent at least $20 million on the project. Why is it so expensive? Because a data warehouse is designed by a committee. It has to include all the data ever conceivably used by an organization: customers, prospects, leads, transactions, promotions, responses, products, prices, models and employees. Since the accountants are involved, the warehouse has to balance to the penny. Since information technology is involved, the warehouse is built by inhouse programmers who have never built a warehouse before, and they are very excited by the idea but have no experience at all.
As most people who have studied data warehouses will say, they never pay for themselves in terms of increased profits. This is because the benefits of using a warehouse are incremental: the warehouse will enable you to do better targeting of your communications. Instead of getting a 2 percent response rate, you will get a 2.1 percent response rate. The question is, will the profits from the 5 percent increase in the response rate pay for the cost of the warehouse? In most cases, they will not, and you can prove it to yourself with a simple Excel spreadsheet before you begin to build your warehouse.
Suppose your company is taking in $150 million per year in direct sales to customers. The benefits of a warehouse can be very nice. Your warehouse has brought in 30,000 more sales, totaling $7.8 million more per year.
But lets look at the incremental profits. Suppose you are making a 30 percent profit rate on direct sales. Your warehouse will lose you about $1.1 million per year. So what should you do? Use the 80 percent rule. Do not build a data warehouse for all the data you could possibly need. Build a simple data mart that meets 80 percent of your marketing needs. Even the largest corporation in America can build such a data mart for less than $1.5 million total, with an annual cost of about $800,000. Using the 80 percent solution, you have converted a $1 million loss into a $1 million profit increase.
Whenever you, or any of your colleagues at work comes up with a large direct response project, Web site or warehouse, ask this question: How much could we save by concentrating only on the easiest 80 percent and postponing the rest for later? You will be amazed at the profitability of the answers.