The 80/20 Rule of B2B Customer Retention: Why Firing Clients Can Double Your Profits

Intro

As a business-to-business or B2B enterprise, you might feel that more clients equate to more money and success. Unfortunately, this kind of thinking can definitely deplete your resources and slash your profits. The Pareto principle, or simply the 80/20 rule support this claim

The rule states that about 80% of your profits is from just 20% of your clients. So it's not about the number of clients you have but their impact.

To help you understand better, this post will show you just what the 80/20 rule is when it comes to B2B customer retention, how it works, and why letting go of your unprofitable clients actually grows your bottom line.

Understanding the True Cost of Client Relationships

Building a relationship with clients can be pretty expensive, mainly for B2B. Each client requires support, communication, and resources, which are bound to add up. However, not all clients make the same value.

There could be some clients who take great time and effort but do not bring enough income into the business to cover the cost. Knowing what a relationship with each of your clients really costs is essential for ascertaining which ones to retain.

The real value of a client relationship encompasses both direct and indirect costs, which include but are not limited to the following:

• Time spent in communication and support,
• Lost opportunities when you cannot take on more lucrative clients, and
• Potential losses from clients that do not pay timely or at all.

The Math Behind the 80/20 Rule in B2B

The 80/20 rule is a principle that basically says in any portfolio, a small number of the clients usually account for the biggest sources of revenues. Take for instance a case where you happen to have 100 clients whose revenues total up to $100,000.

For such, 20 or 20% could be generating $80,000 or 80% of your revenues, while the remaining revenues from 80 clients bring in revenues of just $20,000.

This huge difference in revenues between these two classes explains the importance of identifying who your better customers are, and then focusing on those.

Strategic Link Building Through Client Optimization

It's also important to concentrate on your most lucrative clients to better allocate resources. Weed out the unprofitable ones and discard them to free up more time and energy for those that bring in the biggest bucks.

Agencies like Seeders help analyse client data to show you which clients are most lucrative. This allows you to cement relationships with your best clients with value-added services and support, creating a tighter-more efficient-business model.

And, of course, greater profitability is achieved that way. Focusing on your best clients lays a more solid foundation on which to build growth.

Implementation: The Client Audit Process

To implement the 80/20 rule, you'll want to perform what's called a client audit. Here's how:

• Identify your clients: Write down all of your clients and what each one brings in revenue.

• Calculate your costs: Determine the overall cost of each client relationship, including all expenses.

• Rank your clients: Rank them based on money brought in versus money outlayed.

• Identify unprofitable clients: Specifically identify any clients that don't bring in enough to cover their own costs.

• Strategize: Devise a plan on how to sever relations with unprofitable clients and instead focus resources on those that bring in more money for the business.

Transitioning Away from Unprofitable Clients

Releasing the unprofitable clients will no doubt be tough; however, it is a must for the long-term benefit of your business. Following are some of the ways to do so politely:

• Communicate clearly: Always make it very clear to your unprofitable clients about your decision in the best possible manner.

• Provide alternatives: This may be to indicate other solutions or services that would serve them better.

• Concentrate on profitable clients: You shall now have more resources to invest in those clients providing higher returns and provide them with better service.

Reinvesting Resources for Growth

After you have freed your way from unprofitable clients, you can begin reinvesting into those resources which offer the most growth impetus. You may consider the following options:

• Adding new talent: You may hire new employees to help service your newer and better clients and contribute towards more growth.

• Invest in Technology: Implement technology that speeds up your processes and efficiency.

• Develop New Services: Create services that benefit your most lucrative customer base.

Risk Mitigation

Implementing the 80/20 rule comes with several risks, but effective strategies can help manage them:

Temporary Revenue Loss Risk

Cutting ties with unprofitable clients can reduce short-term revenue.

Mitigation: Gradually phase out these clients while monitoring cash flow. Enhance services for profitable clients to help offset losses.

Reputation Damage

Clients may feel neglected, harming your reputation.

Mitigation: Communicate openly with transitioning clients, thanking them for their business and offering referrals to other providers.

Loss of Talent

Risk: Focusing on fewer clients may lead to losing dedicated employees.

Mitigation: Involve your team in discussions about the new strategy and provide training to help them adapt.

Client Concentration Risk

Risk: Relying heavily on a few clients increases vulnerability if they leave.

Mitigation: Diversify your client base and strengthen relationships with existing clients through regular engagement.

Tools and Technologies

There are several tools which can help you in effectively implementing the 80/20 rule. Some of the useful ones are as under:

• Customer Relationship Management Software: It can track the interaction with clients and revenues against them.

• Accounting Software: It will track expenses for you and can also work out the true cost of a client relationship.

• Data analytics tools: These help in the identification of the trend in the client's behaviour to help inform your decisions.

Conclusion

The 80/20 rule integrated into your B2B strategy lets you focus on what really matters: your most profitable customers. It involves getting rid of ineffective relationships that waste resources, so those resources can be freed up to extend the best service and growth with your top customers.

That said, audit your client base today and prioritise those leading your success.