Top Market Strategy

Applying the 80/20 Rule

Elizabeth Rush Kruger

• Publisher: Business Expert Press
• Year: 2011
• Print ISBN:
  9781606493106
• eBook ISBN:
  9781606493113
• Topic: Business
• Subtopic: Marketing
• Index: Business

Virtually every business seeks to increase its profit from customers, but few business executives realize that a universal principle governs their customer profitability. They may be applying the 80/20 rule to sales, quality control, investing, production, or other business functions without realizing that the 80:20 ratio actually summarizes the Pareto distribution of inputs to outputs. According to his equilibrium theory of relationships, stability is reached when inputs in the top 20% generate 80% of the outputs while inputs in the bottom 80% generate 20% of the outputs. Recently mathematicians confirmed that the Pareto distribution is as universal as the normal "bell-shaped" distribution, but is log linear and predicts results, rather than probabilities. Applying this universal principle to customer profitability, a typical business can predict that customers in the top 20% generate 80% of customer profitability (four times more profit than expected), whereas customers in the bottom 80% generate only 20% (one-fourth as much as expected). This means the 20% most profitable customers tend to be 16 times more profitable than the 80% least profitable customers. In order to capitalize on the Pareto principle, a business should 1. segment its customers by their profitability, 2. distinguish the top 20% of its customers in top market segment from the bottom 80% of the customers in the bottom market segment, and 3. target the top market segment with its marketing strategies. The purpose of this book is to show business students and executives how to implement this process and thereby achieve the predicted results.

Part I

Marketing Fundamentals

Chapter 1

Essentials of Marketing

1.1 Marketing

Simply stated, marketing facilitates the exchange of value between parties. This means that your customers are willing to pay a higher price when your business offers more value. Thus your profit from customers measures how well your business responds to the desires of its customers, thereby fulfilling the golden rule:

“Do unto others as you would have them do unto you.”1

A business can market anything—a product, service, location, candidate, or issue—by making decisions relative to four basic tools: product, price, place, and promotion (Table 1).

Table 1. Tools of the Marketing Mix

Tools	Aspects
Product	Brand name, design, benefits, features, quality, packaging, labeling, warranty, add-on services, and line extensions
Price	Retail price, leasing, payment plan, interest rate, credit policies, price discounting, trade-ins, free services, and bundling with other items
Place	Length and members of the distribution channel; governance; agreements; sales training; technical training; commissions; bonuses; territories; warehousing; logistics; transportation; delivery; on-site promotion; customizing; and policies on sales, collections, and returns
Promotion	Reputation, unique selling proposition (USP), graphics, heading, copy, media vehicles, timing, advertising, sales promotion, buzz, viral marketing, direct marketing, Internet marketing, personal selling, referrals, sponsoring, and publicity

1.2 Marketing Strategy

Every successful business implements a strategic marketing plan that distinguishes the business from its competitors.

A strategic marketing plan specifies how a business will serve its target market through its product, pricing, distribution, and promotional strategies. The three steps in developing a strategic marketing plan are segmenting customers, targeting a market segment, and positioning the business:

1. Segmenting divides (i.e., segments) a market into subgroups (i.e., market segments) and describes the distinguishing characteristics and desires of each market segment.
2. Targeting evaluates various market segments, selects the best one as the target market, and focuses resources on this market segment.
3. Positioning differentiates a business from its competitors by implementing distinctive marketing strategies for serving its target market.

A business maximizes its profit by segmenting the market, targeting its most profitable market segment, and positioning the business to serve this target market.

Table 2. Bases for Segmentation

Categories, sources, and costs	Bases for segmentation
Demographic segmentation Source is government Low cost	Gender, age, income, occupation, socioeconomic status, education, size of the family, stage of the family life cycle, religious affiliation, ethnicity, language, and nationality
Geographic segmentation Source is government Low cost	Climate, population density, trade agreements, time zone, region, nation, district, state, county, market area, city, ZIP code, and census tract
Psychographic segmentation Source is subscriptions and memberships Medium cost	Personality, lifestyle, attitudes, social class, and values
Behavioral segmentation Source is customers High cost	Occasion, evaluation, readiness, user status, end use, benefits sought, usage rate, problem, desire, media preference, loyalty, and profitability

1.3 Market Segmentation

The market of a business consists of all who have the desire, authority, and ability to buy from the business, either now or in the future. Market segmentation divides the market into distinct market segments and describes their distinguishing characteristics. Members of a market segment are homogeneous (i.e., similar) to one another, yet heterogeneous (i.e., distinct) relative to other market segments. Market segmentation can divide customers into market segments by their demographic, geographic, psychographic, or behavioral characteristics (Table 2).

Behavioral segmentation is more direct and actionable than other approaches to segmentation since this process categorizes customers by their buying behavior.

Table 3. Criteria for the Target Market

Criteria	Requirements
Identifiable	Members of the market segment are similar to one another yet are significantly different from other customers.
Actionable	The business can differ from its competitors by responding to the unique motivations and desires of the market segment.
Underserved	The business can fulfill an unsatisfied desire of the market segment.
Accessible	The business can target the market segment with promotions and publicity
Substantial	The business expects high profit due to the market segment's size, high usage rate, or insensitivity to price.
Growing	The business expects that economic, demographic, cultural, governmental, environmental, or technical trends will increase the demand of the market segment.
Sustainable	The business can generate a long-lasting competitive advantage with the market segment through capital investment, expertise, legal protection, or economies of scale.

1.4 Target Marketing

Target marketing is the process of evaluating market segments and selecting the best one as the target market. Marketers evaluate each market segment relative to certain criteria (Table 3) and multiply these scores to calculate each market segment's overall score as a predictor of its long-term profitability. Since scoring low on any criterion dramatically lowers its overall score, one “fatal flaw” can disqualify a market segment from selection as a target market...

Table of contents

• Title Page
• Copyright Page
• Abstract
• Keywords
• Contents
• Illustrations
• Icons
• Tables
• Foreword
• Preface
• Part I: Marketing Fundamentals
• Part II: The 80/20 Rule
• Part III: Application to Profit From Customers
• Part IV: How to Increase Profit From Customers
• Appendixes
• Notes
• References
• Announcing the Business Expert Press Digital Library