“Are You Leaving Money on the Table? Learn How to Price Like a Pro using 80/20.”

“Are You Leaving Money on the Table? Learn How to Price Like a Pro using 80/20.” 

Introduction.

Have you ever wondered why some parts of your business bring in more profits than others? This is where the 80/20 principle, or Pareto Principle, comes into play, a concept that can dramatically transform your pricing strategy and boost your profitability. Essentially, the 80/20 rule suggests that 80% of your results come from just 20% of your efforts. In the context of pricing, this means that a significant portion of your profits likely comes from a small fraction of your products or services.

By understanding and applying this principle to your pricing decisions, you can focus more on what truly drives your business’s success and less on what doesn’t add much value. This approach not only simplifies decision-making but also maximises the efficiency of your resource allocation. 

In this blog, we’ll dive into how you can leverage the 80/20 rule to optimise your pricing strategy, ensuring that you concentrate on enhancing the profitability of the products or services that contribute the most to your bottom line. Get ready to discover a powerful way to refine your business model and drive substantial growth.

What is the Pareto effect or 80/20 Principle?

The Pareto effect or 80/20 principle is named after Italian economist Vilfredo Pareto. Pareto’s observation was in connection with population and wealth. Pareto noticed that approximately 80% of Italy’s land was owned by 20% of the population. He then carried out surveys on a variety of other countries and found to his surprise that a similar distribution applied. Over the years the 80/20 principle has been observed in just about every area of life and business.

The 80/20 principle asserts that the minority of causes, inputs, or efforts, usually lead to the majority of results, outputs or rewards.  But that’s barely the tip of the iceberg, the real power in 80/20 is that you can disregard 80% of just about anything.  80/20 says if you hire ten salespeople, two of the ten will generate 80% of your sales and the other eight will only generate 20%. This means person per person, the two are sixteen times as effective as the eight. That’s right, a good salesperson isn’t just 50% better, he or she is 16 times better. 

All of this means that there is huge leverage in 80/20 and much to gain if you pay attention and much to lose if you don’t. Understanding the 80/20 principle is crucial if you want to make smarter decisions about your pricing strategy. 

Applying 80/20 thinking to your pricing strategy.

The 80/20 rule, or Pareto Principle, is a powerful tool for optimising your pricing strategy. By recognising that 80% of your results come from 20% of your efforts, you can focus on the areas that will yield the highest returns. When applying 80/20 thinking to your pricing strategy, consider these three key areas: customers, products, and channels.

1. Customers

Start by identifying your top customers—the 20% who generate 80% of your revenue. These are the customers who find the most value in your offerings and are willing to pay a premium for them. Analyse their purchasing behaviour, preferences, and feedback. By understanding their needs, you can tailor your pricing strategy to reflect the value you provide to them.

For instance, you might offer premium pricing for customised services or products that cater specifically to this segment. Implement loyalty programs or exclusive offers to retain these high-value customers. By focusing on the top 20%, you can maximise your revenue without alienating your broader customer base.

Identify Your Top Customers.

Identifying your top customers is the first step in leveraging the 80/20 rule to enhance your pricing strategy. These top customers, the 20% who generate 80% of your revenue, are the backbone of your business. Understanding who they are and what drives them can significantly impact your pricing decisions.

Start by analysing your sales data. Look for patterns that distinguish high-value customers from others. These might include purchase frequency, average order value, or specific product preferences. Once you have identified these segments, you can develop targeted pricing strategies that cater to each group’s unique needs and willingness to pay. Use customer relationship management (CRM) software to gather and analyse this data efficiently. This software can help you track customer behaviours, purchase histories, and interaction frequencies.

Next, segment your customers based on their lifetime value (LTV). This metric helps you understand the total revenue a customer is expected to generate over their relationship with your business. High LTV customers are typically your top 20%, and focusing on them can yield the most significant returns.

For instance, for your top-tier customers—those who generate the most revenue and show high loyalty—consider offering premium pricing for exclusive or high-value products and services. These customers are often willing to pay more for added benefits and superior service.

For mid-tier customers, offer value-based pricing with bundled services or products that provide a cost-effective solution. This can encourage them to increase their spending while still feeling they are getting good value.

Finally, for price-sensitive customers or those at the entry-level, consider competitive pricing strategies or discounts to attract and retain them. Providing introductory offers or tiered pricing can help convert these customers into higher-value segments over time.

By segmenting your market and tailoring your pricing strategies accordingly, you can maximise revenue, improve customer satisfaction, and ensure that each segment feels valued. This targeted approach allows you to capture more value from different customer groups, enhancing your overall business performance.

Conduct surveys and interviews to gain deeper insights into their needs, preferences, and pain points. Understand why they choose your product or service over competitors. This qualitative data complements your quantitative analysis, providing a comprehensive view of what your top customers value most.

Las Vegas and Big Gamblers: Utilising 80/20 to Identify Whales.

In the bustling world of Las Vegas casinos, the 80/20 rule plays a pivotal role in identifying and catering to big gamblers, often referred to as “whales.” These whales represent a small percentage of the casino’s clientele but contribute a substantial portion of the revenue. Understanding and leveraging the 80/20 principle allows casinos to focus their efforts on these high-value customers, ensuring they receive top-tier experiences that justify their significant spending.

Casinos meticulously analyse their customer data to identify whales. This involves tracking gambling habits, average bet sizes, and overall spending. By recognising the top 20% of gamblers who generate 80% of the revenue, casinos can tailor their offerings to meet the unique needs of these high rollers.

For these elite customers, casinos offer exclusive perks and services. This includes luxury suites, private gaming rooms, personalised concierge services, and complimentary transportation in private jets. These tailored experiences are designed to enhance the overall satisfaction and loyalty of whales, ensuring they return and continue to spend large sums of money.

Additionally, casinos develop specialised marketing campaigns targeting these high-value gamblers. Invitations to exclusive events, personalised promotional offers, and direct communication channels are established to maintain strong relationships with these key customers. By focusing on the top 20% of their clientele, casinos maximise their revenue and build long-term loyalty.

This strategic application of the 80/20 rule ensures that casinos invest their resources where they will have the greatest impact. By identifying and catering to whales, Las Vegas casinos create a lucrative and sustainable business model that capitalises on the spending power of their most valuable customers. This approach not only drives profitability but also sets a standard for customer service and exclusivity in the gaming industry.

2. Products

Applying the 80/20 rule to your product line can significantly enhance your pricing strategy. Start by identifying the top 20% of your products that generate 80% of your profits. These high-margin products are your key revenue drivers and deserve your utmost attention.

Focus on understanding why these products are successful. Is it their quality, uniqueness, or the problem they solve for your customers? By answering these questions, you can further emphasise their strengths in your marketing efforts. Consider increasing their prices, as customers who purchase these items are often less price-sensitive due to the perceived value.

Next, prioritise these high-margin products in your promotional activities. Highlight them in your marketing campaigns, feature them prominently on your website, and encourage your sales team to focus on them. Offering premium versions or bundles that include these top products can also enhance their appeal and justify higher prices.

For the remaining 80% of your products, evaluate their performance critically. Determine if they can be bundled with your top products to add value or repositioned to better meet customer needs. If certain low-margin products consistently underperform, consider phasing them out. This streamlining ensures your product mix is aligned with profitability goals and reduces operational complexities.

By focusing on the most profitable products and optimizing their pricing, you not only increase your revenue but also create a more efficient and effective product line. This strategic approach allows you to invest your resources where they will have the greatest impact, ensuring that your business grows sustainably and profitably.

3. Channels

Finally, assess your sales and distribution channels through the lens of the 80/20 rule. Identify the top-performing channels that generate the majority of your sales. These might be specific online platforms, retail locations, or sales teams. Invest more resources into these channels to maximise their effectiveness.

Identifying Top Channels

Start by analysing your sales data to identify which channels contribute most to your revenue. These might include online platforms, retail locations, direct sales teams, or third-party distributors. Typically, you’ll find that a small number of these channels (around 20%) are responsible for a large portion of your sales (approximately 80%).

Maximising Top-Performing Channels

Once you’ve identified your top-performing channels, invest more resources into these areas. For online platforms, this could mean enhancing your website’s user experience, optimising for search engines, or increasing your digital marketing budget. For retail locations, consider improving store layouts, training staff to upsell effectively, or expanding inventory based on customer preferences.

For direct sales teams, provide advanced training, better sales tools, and higher incentives to boost performance. If third-party distributors are among your top channels, work on strengthening those relationships with better terms, exclusive products, or dedicated support.

Streamlining Underperforming Channels

Next, assess your underperforming channels. Determine if they can be improved or if they should be streamlined or eliminated. For example, if certain retail locations consistently underperform, consider closing them and reallocating resources to more profitable stores. If a particular online platform doesn’t yield significant sales, it might be more cost-effective to focus your digital marketing efforts elsewhere.

Diversifying and Testing New Channels

While it’s crucial to focus on top-performing channels, don’t neglect the potential of new or emerging channels. Allocate a portion of your resources to test new sales avenues. This could include exploring social media platforms, developing mobile apps, or partnering with influencers. Use A/B testing to measure the effectiveness of these new channels and decide whether they merit more investment.

Real-World Example: Amazon

Amazon leverages the 80/20 rule by focusing on its most effective channels: its e-commerce platform and Prime membership. The company invests heavily in optimising its website, enhancing user experience, and providing fast shipping for Prime members. Additionally, Amazon continually analyses customer data to improve its logistics and supply chain, ensuring its top-performing channels operate at peak efficiency.

By applying the 80/20 rule to your sales and distribution channels, you can ensure that your business efforts are concentrated where they matter most. This strategic focus allows you to maximise revenue, reduce costs, and enhance overall business performance. Investing in your most effective channels while continuously exploring new opportunities creates a balanced and robust sales strategy that drives sustainable growth.

Applying 80/20 thinking to your pricing strategy involves a strategic focus on the most impactful customers, products, and channels. By honing in on these areas, you can optimise your pricing, increase revenue, and drive sustainable growth. This approach ensures that your efforts are concentrated where they matter most, providing maximum value to both your business and your customers.

Implementing an 80/20 pricing strategy.

Once you grasp the 80/20 principle and identify which products or services are your most lucrative, the next step is to strategically apply this knowledge to refine your pricing strategy. This tailored approach can significantly boost your profitability by ensuring that your pricing is aligned with the value that these key items offer to your customers.

Focus on Value-Based Pricing.

For the top-performing 20% of your products, consider adopting a value-based pricing model (See our blog on value-based pricing). This method involves setting prices primarily based on the perceived value to the customer rather than solely on the cost of production or market price comparisons. Value-based pricing acknowledges that some products or services provide greater value to your customers, and thus, they might be willing to pay more for them. By aligning the price with the perceived value, you can maximise your profit margins on these high-impact items.

Enhancing Product Presentation and Quality.

Enhancing the quality or presentation of these key products can also justify higher prices. Consider whether improvements or additions could increase their perceived value. For instance, updating packaging to something more premium, improving product features, or even enhancing customer service related to these products can make your customers more willing to accept a higher price point. This improvement in quality should also be communicated clearly to your customers through marketing to reinforce the perception of high value.

Dynamic Pricing Strategies.

For services or products that have variable costs or fluctuating demand, implementing dynamic pricing can be particularly effective. This strategy adjusts prices in real time based on current market demands, competitor prices, or other external factors. For example, if you offer a service that’s in higher demand during certain seasons or events, dynamic pricing allows you to capitalise on this by increasing prices during peak times. This ensures that you’re not leaving money on the table and that your pricing strategy is as responsive as your business needs to be.

Psychological Pricing Tactics.

Incorporate psychological pricing tactics that make the price seem more attractive. Pricing items just below a round number, known as “charm pricing,” can make a price point feel significantly lower—$19.99 feels much cheaper than $20, even though the difference is minimal. Another tactic is using price anchoring, where you present a higher-priced option alongside the items you want to sell most. This makes the desired products appear more affordable in comparison, potentially boosting sales of these strategically important items.

Regular Review and Adjustment.

The market isn’t static, and neither should your pricing strategy be. Regularly reviewing how your products are performing in the market, and how customers are responding to your pricing, is crucial. Adjustments may be necessary based on new competitor offerings, changes in cost, or shifts in customer preference. Staying agile and responsive to market dynamics ensures that your pricing strategy continues to optimise revenue from your most valuable products.

By concentrating your efforts and pricing strategy on the areas of your business that yield the highest returns, you’re not just working harder, but smarter. This focus allows you to efficiently use your resources where they can make the biggest impact, leading to increased profitability and business growth.

Once you’ve strategically adjusted your prices and focused on enhancing the value and appeal of your top-performing products, the next crucial step is to effectively implement these changes across your business operations. Here’s how you can ensure that the updated pricing strategy is successfully adopted and yields the desired results:

1. Communicate Changes Clearly.

It’s essential to clearly communicate any pricing changes to your customers to avoid confusion and potential dissatisfaction. Be transparent about why these changes are happening—whether it’s due to improved product quality, increased production costs, or enhanced service offerings. Use various channels such as your website, email newsletters, and social media to reach different segments of your audience. This transparency not only helps in managing customer expectations but also builds trust by showing that your business practices are fair and thoughtfully considered.

2. Educate Your Team.

Your sales and customer service teams should be well-informed about the rationale behind the price adjustments and how to communicate these changes to customers. Provide them with training sessions and FAQs that they can refer to when handling inquiries or concerns from customers. This preparation enables them to confidently address questions and helps ensure a consistent message is relayed, reinforcing the value proposition behind the new pricing.

3. Monitor Customer Feedback.

After implementing new pricing, closely monitor how customers respond. Pay attention to sales data, customer inquiries, and feedback across all platforms. This real-time data will give you insights into customer acceptance and satisfaction levels. If you notice resistance or negative feedback, be prepared to address these concerns promptly. For instance, offering promotions or loyalty discounts can help ease the transition for existing customers who might feel impacted by sudden price increases.

4. Adjust Marketing Strategies.

Your marketing strategies may need adjustment to support the new pricing structure. Highlight the enhanced features or superior quality of your products that justify the new prices. Create marketing campaigns that focus on the added value these top-performing products offer. Visual content, customer testimonials, and case studies can be effective in illustrating the benefits and justifying the cost, helping to persuade hesitant buyers.

5. Evaluate the Impact on Sales and Profitability.

It’s crucial to evaluate how the changes affect your overall sales and profitability. Analyse if the increased prices are compensating for potentially lower sales volumes or if they’re effectively tapping into the customer’s perceived value, thus driving higher revenue. This analysis will help you understand if your pricing strategy is working as intended or if further tweaks are needed.

6. Be Ready to Make Further Adjustments.

The market is dynamic, and customer preferences can shift rapidly. Be agile and ready to make further adjustments to your pricing strategy based on ongoing market analysis and customer feedback. Staying responsive to changes not only helps in maintaining competitiveness but also ensures that your pricing strategy remains aligned with market conditions and business objectives.

By taking these steps, you ensure that the implementation of your new pricing strategy is smooth, well-communicated, and effectively integrated into your business operations, paving the way for improved customer satisfaction and increased profitability.

Final Word.

Harnessing the power of the 80/20 Pareto Principle can transform your business’s pricing strategy, leading to increased profitability and sustainable growth. By identifying and focusing on the top 20% of customers, products, and channels that generate the majority of your revenue, you can make more informed and strategic decisions.

In the realm of customers, understanding who your high-value clients are and tailoring your pricing and services to meet their needs can significantly boost your revenue. When it comes to products, concentrating on the top performers and ensuring they are prominently featured and effectively marketed can enhance your profitability. Finally, by optimising your sales and distribution channels, investing in top performers, and streamlining underperformers, you can maximise efficiency and returns.

Real-world examples, such as Apple, Amazon and Las Vegas casinos, demonstrate the effectiveness of the 80/20 rule in action. These organisations have mastered the art of focusing on what truly drives their success and have reaped the rewards as a result.

Applying the 80/20 rule to your business may require initial analysis and adjustment, but the long-term benefits are well worth the effort. By strategically focusing on the most impactful areas, you can ensure that your business not only survives but thrives in a competitive market. Embrace the 80/20 principle, and watch your business transform, maximising value and driving growth.