Writing a Business Plan – Describing How Your Business Will Profit

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Is your business plan targeting your best market segment? You see, we are all created equal, but some of your prospects are more "equal" than others. According to a universal law, 20% of your prospects are 16 times more valuable than others. Let us learn how to use this powerful law rule to increase the revenue and profit of your business.

Rule of Thumb

Most salespeople can see that most of their sales come from a few customers, but successful salespeople discover that the 80/20 rule of thumb applies to their customers. They know that 80% of their sales come from the top 20% of their customers, whereas only 20% of their sales come from the bottom 80% of their customers. Does this seem true for the customers of your business?

Universal Principle

Let us see why the 80/20 rule will work in your own business. This rule of thumb is actually a universal law that applies to any large random sample of input and output data. Pareto (1896/7) discovered that the relationship of inputs to outputs – in both nature and society – is consistently 80:20 and the log of this distribution is linear. Recently, Newman (2006) proved that, at equilibrium, the top 20% of inputs generate 80% of the outputs. Newman found that even the input-to-output relationship of random numbers approximates a straight line. This mathematician confirmed Pareto's discovery – so evidently, the top 20% of your customers will generate 80% of your sales and 80% of your profit from customers.

Suppression of Pareto's principle

Without a doubt, Pareto's distribution of inputs to outputs should be as respected as the "bell-shaped" normal curve, yet knowledge of this universal law was suppressed. You see, people felt that 20% of the households should not control 80% of the wealth, and judged this fact to be so grossly unfair it was immoral. However, Pareto's discovery, like all universal laws, should not bejudged nor suppressed. Should knowledge of the law of gravity be suppressed since people can die from a bad fall? Of course not! Neither should knowledge of Pareto's universal law be suppressed.

Previous Applications

So instead of suppressing this universal law ,, we should harness its power for good. Pareto believed "if the pie is always going to be sliced ​​unevenly, then the best way to help the poor is by enlarging the pie" (Pareto / Powers ed. 1921/1984, 25). For example, applications of this principle have increased productivity (Zipf 1949), improved quality control (Juran 1951), empowered software (IBM 1964), and improved efficiency (Koch 1998). Now, let us learn how to apply this universal law to improve the sales and profit of your own business.

Application to sales

Typically, the top 20% of your customers buy 4 times more than expected, while the bottom 80% of your customers buy 1/4 as much as expected. So, the top 20% of your customers tend to buy 16 times more than your other customers. Do you want to quadruple your sales? If so, replace customers in the bottom 80% with new ones who are like the top 20% of your customers. Just follow these steps:

  1. Automate all interactions with the bottom 80% of your customers and do not pay agreements for serving these customers (the bottom market segment).
  2. On 1 day of the week, target customers in the top 20%. Your sales force will make 80% of your usual sales commission since these customers (the top market segment) tend to buy 4 times more than expected.
  3. On the other 4 days of the week, focus on prospects who are also in the top market segment and convert them into customers. These new customers tend to buy 16 times more than customers in the bottom market segment.
  4. Replace all customers in your bottom market segment with new customers in your top market segment. When all of your customers buy 4 times more than expected, your total sales will quadruple.

Application to Profit from Customers

Can this universal law quadruple your profit from customers? Yes, the 80/20 rule governs all outputs of any business, even your profit from customers. Your goal is to replace all customers in the bottom market segment with new customers who are members of the top market segment. These are the three phases in implementing a top market strategy:

  1. Distinguish customers in the top 20% from your other customers.
  2. Predict which prospects are similar to them and expect them to earn 16 times more profit than the bottom 80% of your customers.
  3. Create marketing strategies for serving these customers, your top market segment.

Action Plan

Your business can quadruple its customer profitability when you fully implement these eight easy steps of an action plan.

  1. Interview diverse customers. Seek an understanding of what makes your customers "tick". Conduct 7 – 12 in-depth interviews with correspondents who represent the diversity of your customers. Ask asking questions about their buying behavior, interests, and demographics and summarize their responses on each topic. When their responses become repetitious, you have interviewed enough customers.
  2. Sample your customers. Use your sales records to set quotas on the most important characteristics of your customers. When these quotas are fulfilled, your responses will proportionally represent your customers. Survey at least 150 respondents so the responses of this sample will predict the responses of all of your customers.
  3. Create a customer survey. Use the five most common responses on each topic as response options for questions in the customer survey. Introduce the survey by firing its sponsor, purpose, importance, and brevity. Then qualify the contacts as customers and motivate them to respond by eliciting suggestions for improvements. Then ask more questions about their buying behavior and life style, but defer demographic questions to the end of the survey.
  4. Sort responses by their profitability. Score responses on their purchases and loyalty to your business and multiply these scores to estimate their potential profitability. Then sort your responses and group the most profitable 20% customers into the top segment and the other 80% into the bottom segment.
  5. Distinguish customers in the top market segment. Use percentages or rates to summarize how customers in each market segment respond. Compare their responses to each question to test whether the responses of the two groups are significantly different. Profile the characteristics of customers in the top 20% that distinguishing them from other customers.
  6. Select the top market segment segment as your target market. Evaluate the top market segment on requirements for a target market. For example, these customers (1) identifiable, (2) unsatisfied, (3) highly profitable, (4) accessible, (5) exclusively motivated, (6) increasing in demand, and (7) protected by a sustainable competitive advantage ? If so, select the top market segment as your target market.
  7. Focus your marketing strategies on serving them. Target your top market segment and respond to their unsatisfied desires. Price the offering to maximize your total profit, target them through their favorite media, and appeal to their unique purchase motivations. Ramp up your operations for a growing demand and expect substantial profits.
  8. Convert top prospects into top customers. You can easily convert top prospects into top customers since both are members of the top market segment. You can predict that these new customers will generate 16 times more profit than the bottom 80% of your customers.

Summary

According to a universal law, the 80/20 rule, your best market segment is the most profitable 20% of your customers. Thus, you can expect to quadruple your sales and profits from customers when your business replaces all customers in the bottom market segment with new customers who are members of the top market segment. By harnessing this universal law for good, you can improve world prosperity, one business as a time.

Bibliography

Juran, Joseph Moses. Quality Control Handbook . New York: McGraw-Hill, 1951.

Koch, Richard. The 80:20 Principle: The Secret of Achieving More with Less. New York: Doubleday, 1998.

—. The Breakthrough Principle of 16x: Real Simple Innovation for 16 Times Better Results . Dallas, TX: Pritchett Publishing Group, 2006.

Newman, MEJ "Power Laws, Pareto Distributions and Zipf's Law," Department of Physics and the Center for the Study of Complex Systems, University of Michigan, Ann Arbor, MI 48109, 2006. (accessed 3/17/2011).

Pareto, Vilfredo. Cours d 'Economie Politique (Course in Political Economy). Lausanne, Switzerland: Rouge, 1896/7.

—. Trasformazione Della Democrzia (The Transformation of Democracy ). Milan, Italy, Corbaccio, 1921. Edited by Charles H. Powers and translated by Renata Girola. New Brunswick, NJ: Transaction Publishers, 1984.

Zipf, George Kingsley. Human Behavior and the Principle of Least Effort. Cambridge, MA: Harvard University, 1949.

Copyright July 2008 Strategic Power, 2011 Business Expert Press, All Right Reserved

Source by Elizabeth Kruger

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