Starbucks, Casino 'Whales' and the 80/20 Pricing Power Curve
Entrepreneur's New Year’s Guide
Your pricing strategy is the most critical aspect of marketing. Why? Because you can have the best customer list in the world and the best sales pitch in the world, but if your pricing strategy is lousy, you'll still go broke.
Please understand, the money you get is only half the equation. The other half of the equation is even more important: How much value does the customer get?
"Economics" is about both these things. Economics should always be the starting point of any marketing conversation, especially if you're searching for a breakthrough and not just a minor improvement.
The first thing to understand about economics is it's 80/20 all the way up and down. 80/20 says that 20 percent of the people will spend 4 times the money. But 80/20 is fractal; that means there's an infinite series of 80/20s, a new one inside each 20 percent as you slice your audience thinner and thinner. My book 80/20 Sales & Marketing is the first book to expand on this.
This means that 4 percent of the people will spend 16 times the money, and 20 percent of the 4 percent (0.8 percent) will spend 64 times the money, and 0.2 percent will spend 256 times the money! Memorize this -- it's one of the most powerful facts you could ever know about business.
A lot of people assume their customers are all roughly equal. They're not -- not even close! That's the 80/20 Power Curve in action.
Hotels have $1,200-per-night suites on the top floor. Airlines have red-carpet clubs for their top 20 percent customers. International flights offer $10,000 first-class seats and $20,000 luxury sleeping pods. For the airline, that's sure nice compared to getting $385 for a seat in coach.
The book Whale Hunt in the Desert by Deke Castleman describes how Vegas casinos get 20 percent of their income from a super-elite class of gamblers called "Whales." Whales fly in on private jets and bet $100,000 on a single round of blackjack. Casinos lavish Whales with dedicated staff, perks, amenities, and high-end luxuries that are invisible to every other guest in the hotel.
The 80/20 principle doesn't just work in Vegas. A tiny $1 million charity will most likely get $100,000 of its donations from one single trust, foundation, or individual donor. A $200,000 per year one-man tax practice can and should get $20,000 of business from a single customer.
When you look at all your past buyers, the Power Curve applies to:
- Repeat buys: Of the people who buy more than once, 20 percent of them are responsible for 80 percent of your repeat purchases.
- Money: 80 percent of the overall money comes from 20 percent of your buyers.
- Quantity: 20 percent of your orders represent 80 percent of the quantity.
- Diversity: 20 percent of your orders represent 80 percent of the diversity.
What this means is that if all you sell is scones and cups of coffee ranging from $1 to $5, your business is probably doomed. And if it's not doomed, you're destined to earn a meager living and barely scrape by.
If your website just sells one book or one wedding candle or one exercise band for $29, you're leaving buckets of money on the table. Because if you just scratch one narrow itch on some super-specific topic, the intensity of that itch and the propensity to spend money to scratch it is easily 100:1. Selling that one book was merely a way to attract a long-term customer.
That means you can add a $290 product and a $2,900 product, and you'll probably double your sales. If you have thousands of customers, the spread will be even wider. Many businesses don't have product offerings spanning a 100:1 range, so they're missing all kinds of opportunities to sell to their existing customers.
When you take full advantage of this, your sales and profits immediately go up, making it much easier to go get more customers. You can advertise more, bid more for clicks, promote yourself in more media channels, pay more for leads.
The core question people ask when they pay money is: "What problem can you solve that nobody else can solve?"
Starbucks famously addressed this question by utterly transforming the coffee experience. The concept of a gourmet coffee in a luxury environment with exquisitely appointed decorations and aromas -- cappuccinos and lattes and jazz -- all that was very strange when Starbucks set out to make its cup of coffee "the $3 luxury that almost everyone can afford." That's their unique selling proposition.
Many have forgotten that in the 1980s, coffee was an uninspiring brown beverage that cost 65 cents and was served in a Styrofoam cup with a packet of sugar and some chalky powder that people insultingly called "creamer."
Any business can be transformed the way Starbucks transformed coffee. It doesn't matter if it's insurance, or metal stampings, or jet airplanes; a "gourmet" version is always possible. This can transform the entire industry. Starbucks completely changed the very idea of coffee and inspired thousands of imitators.