A Few Thoughts on Customer Equity: the 20-200 Rule

The value of our business is the sum of the value of all our customer relationships

The value of your company is equal to the sum of all the revenue from all of your customers. Not exactly the textbook definition. Your CFO, without much grumbling, will allow it, however. Most of us are aware of Paretto’s Law, which would suggest that 80% of your profits come from 20% of your customers. A more startling rule is what Kaplan and Cooper call “20/200 Rule.” 20% of our customers return 200% of our profits. While you recover from the shock this statement presents – and, it is verifiable! – it is more important that we realize that there are proven fact-based approaches that lay down a roadmap that allows you to optimize your customers and mitigate the rules.

Like your other assets managed in your portfolio, your customers can be viewed as a portfolio of assets, which you can manage proactively. Successful management of your customer portfolio brings a serie s of cascading benefits to your firm. The primary benefits are your ability to maximize shareholder and stakeholder value; and your ability to optimize your “market coverage strategy.” The latter benefit is vital, since virtually every organization has limited resources. So it is critically important to invest those limited resource in direct proportion to the return we expect to receive from our investment in our primary assets - our customers.