5.3 Current Profitability Segments
If we segment the market of your business by the profitability of its customers, we normally obtain the two market segments shown in Figure 3. The size of each slice indicates the relative size of a market segment, while its color saturation indicates the relative profit from customers in that market segment:
- According to the 80/20 rule, the top 20% of your customers (i.e., your top market segment) generates 80% of your profit from customers. Since your return is four times more than expected (i.e., 80%/20% = 4), we will set the color saturation of this slice at 80% (i.e., 20% × 4 = 80%).
Figure 3. Current profitability segments.
- The bottom 80% of your customers (i.e., your bottom market segment) generates only 20% of your profit from customers. Since your return is one-fourth (20%/80% = ¼) of your expected profit from customers, we will set its color saturation at 5% (i.e., 20 × 1/4 = 5%).
- Thus your total profit from customers is 80% + 20% = 100%.
The most profitable 20% of your customers are 16 times more profitable than the bottom 80% of your customers (i.e., 4/¼ = 16).
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