In this article we describe the Customer Pyramid, a way to segment clients based on the Pareto Effect (20/80-rule).
What is a Client Pyramid?
The Customer Pyramid is a way to segment clients. It is based on the Pareto Effect (20/80-rule). This postulates that 20% of clients generate 80% of the revenue. By making a layout thereof in the form of a pyramid, a visual display emerges. At the top there are the “A” clients, in the middle the “B” clients, and bottom the “C” clients. The goal is then to segment clients according to revenue.
Why a Customer Pyramid?
A Customer Pyramid is an easy way to segment and analyse clients. The business strategy can be adjusted to it.
Criticism on the Customer Pyramid
There has been many criticisms against the Customer Pyramid these past years. Below, a summary.
- The model is based on revenue, yet profitability is important. A solution for this could be by basing the Customer Pyramid on profitability.
- In practice, the model does not go well. The focus is primarily on the top 20 where this could just be the other way around. The top 20 clients in particular is already known. It is better to analyse who the lowest 80% are and why. They are the clients who could potentially grow through into the top segment (top 20%).
- The Pareto Effect would not exist.
A company’s strategy can be based on the Customer Pyramid. Often companies spend the large part of its marketing budget on new clients. The Customer Pyramid, on the contrary, postulates that the money needs to be spent on existing clients. Feasible strategies can therefore be:
- Preserving the Top 20% clients.
- Analysing and developing the lowest 80% clients to foster high potentials towards the top 20%.