Should you be hunting whales?

Fender Guitars once did a study on their market distribution, and found that 90% of first-time guitar players will abandon the instrument within a year and make no further purchases from them. However, the 10% that continue playing will go on to spend thousands on guitars, amplifiers, and other equipment over their lifetime, generating consistent and plentiful revenue. It may not surprise you too much to know that a business catering to a hobby like guitars has to rely on enthusiastic spenders, but what may surprise you is just how many companies also depend on on this business model.

In fact, a study found that 20% of customers accounted for?more than half the money?brought in by over 80% of the largest companies in America. This includes corporations such as Amazon and Uber. These are seemingly ubiquitous companies that we patronise frequently, and most of us would assume their profits are spread evenly over the population, but that is not the case. You might think Uber rides are expensive, but how much do you actually spend a month on them? If all of Uber’s customers used it as (in)frequently as the average user, they’d go bust in a month. It’s 20% of their customers who take Uber rides so often that it keeps them in profit.

So, what’s going on here? Why do we see so many companies hitting this barrier? If Amazon and Uber aren’t making much money from 80% of their customers, does that mean they’re failing? Do they need to do more marketing? What can be done about it?

Well, the fact is that not much can be done about it. Why? Because this is not a failing of business strategy or market penetration or customer adoption. This 80/20 split is a phenomenon that exists in society, and is seen in circumstances far outside of business. It’s called the?Pareto Principle, and?states that for many outcomes, roughly 80% of consequences come from 20% of causes. For example, 80% of charitable donations come from 20% of donors; 80% of computing problems are caused by 20% of known bugs; 80% of crimes are committed by 20% of criminals; 80% of infections in a pandemic are spread by 20% of the infected. It is sometimes referred to as "the vital few", where a small number of people have a vastly disproportionate effect, usually without intending to or even being aware of doing so.

There are many theories as to why the Pareto Principle appears time and time again in business. There are obvious reasons – the Pareto principle applies to wealth distribution in general (80% of the world’s wealth is held by 20% of the population), so of course those people spend more money, but that’s not the whole story. Fender could reduce its prices, do more marketing, become the only guitar retailer in the world, but none of that would change the fact that learning the guitar is a skill that takes time, patience, and dedication. Fender can’t magically sell people the ability to play the guitar, and people who can’t play the guitar aren’t going to spend much money on it. Fender knows who its target market is, and focuses on them. If you don’t play guitar, ask yourself when the last time you saw an ad for Fender was. Now ask yourself, would you have bought a guitar if you had seen one? Fender knows the answer.

This is increasingly known as "the whale model" - most customers are small fish who contribute almost nothing, but a few are whales, spending 10 times the average amount, and those people are what keeps the business going. In fact, it’s generally only companies such as Netflix, which just has a subscription plan, that doesn’t use this model. And yet, whenever people talk about marketing, they talk about reaching as many people as possible, casting the net wide, converting more and more. This is often not the best approach. Like the proverbial horse to water, you simply aren’t going to be able to force that 80% to drink more than they want to. Instead of trying to get more customers, start nurturing the ones you already have. Focus on your leads’ lifetime value, rather than volume. Try leading a whale to the water instead; they like it more than horses do, and they have bigger mouths.