Challenging the 80/20 rule for agencies.

NBD graphAbove is typically how  an agency’s clients are distributed.  It is a negative binomial distribution (NBD), sloping down from left to right.

It is what Byron Sharp in his award-winning book How Brands Grow found to be the distribution of buyers of consumer products and I think it is likewise for agencies.

I want to explain here how this simple model applies to agencies and how to increase agency revenues from understanding this model.

Just to avoid the ‘so what’ conclusion, lets look at what is to be done, and why is it of use.

In short Sharp says that a brand has very few high spenders, for example in 2016 there will be a few (crazy) people who drink 3 cans of Pepsi every single day so consuming 3 x 365 = (1095 p/a).

At the other end of the scale there will be lots and lots of lots of people who don’t drink any cans at all in 2016, zero cans (0 p/a ), but may drink a can next year, they are still customers they just didn’t buy in 2016.

And then there are those people who just drink one can per year (1 p/a) and in the middle the consumers who buy say buy one can every six weeks or so, (9 ish p/a) and so on all down the curve,

So the curve slopes down from left to right (NBD). Part of it maybe flattish special as it tails of towards the high users.

The conclusion is double jeopardy that states  – ‘brands with more market share have more buyers, and those buyers are slightly more loyalty.

And retention double jeopardy – brands lose buyers in proportion to market share (big brands lose more in absolute and less in percentage terms).’

Sharp Challenges Pareto’s 80/20 rule

Historically the perceived wisdom was that 80% of a business revenues came from 20% of its client base.  In fact when Sharp looked at the evidence it was nearer 60/40 or 50/50 as Martin Weigel from W+K explains very well here.

The point is light users are far more important that we’d thought.  They were only 20% important but now they are more likely to be 40% to 50% important.  That’s 100% plus important.

So when a leading brand draws their NBD graph and a challenger brands draws theirs – it is in the low spend area they differ (most) greatly.

The leading brand has a huge amount more of light or occasionally buyers.  The difference in heavy users is there too but not as pronounced as the difference in light users.  So what a challenger brands lacks is the light and occasional users that a leading brand gets in.  So they need to target gaining more occasional and light users.

Agencies

Agencies tend to have a similar distribution (NBD) many low spenders and few big spenders and of course some in the middle.

Low spenders are in the green section of the above graph.  The agency has a low point of entry for a new client and the goal of the agency is to develop the business into a medium spender.

Low spenders will come from referrals into the agency from other low spenders and some medium spenders and from new business channels, where a low point of entry is sold to get the client on-board.

Medium spenders are in the orange section of the graph.  The agency will have less of these than the low spenders and they will come from business development moving a client from a low spender to a medium spender and referrals from other medium and high spending clients of the agency.

High spenders are in the red section of the graph.  The agency will have very few of these. This is the prized destination for all the agency’s clients.  Of course not all of them will make it there. Some will stay stuck at low of medium spend and some will die (leave the agency) before their time, sad but true.

More high spenders may arrive from referrals from their current high spending clients. The two easiest ways to get a high spending client is to move from orange to red or get a red to come straight into the agency.

Low v High

The interesting point that Sharp makes when talking about consumer products is that the difference in the curve of a leading brand and a challenger brand is the difference in the quantity of low users more so than the difference in  high users.

The leading brand will have significantly more low users than it’s competitors. The curve will move slightly to the right, in other words outwards.

There maybe a difference in high too (i.e. slightly more high users) but the vast and significant difference is the occasional users who can then move down the graph to the medium and high zones.

Is it the same for agencies?   Well, yes I think so .

The quantity of new prospects that an agency can get on board with a low entry price point is key.  Then to move them along the graph, low, to medium, to high.

Then to get referrals from current clients as and when they are in the medium and high spending zones. So some new business comes straight into the medium and high spend zones without having to go via the green zones.

Double jeopardy in agencies –  in short a smaller agency is effected far more from a loss of a current client than a large agency, no shit Sherlock and the difference between a large agency and a small one is the quantity of low-level users.

The other interesting finding of Sharp’s when dealing with brands which is of use to agencies is that of ‘Usage drives attitude – not the other way round. We grow to like what we use. Call it the “I love my mum” syndrome, which explains why all brands get good ratings in satisfaction surveys.’

So the goal of an agencies new business programme is to get marketers to love (rate highly) their agency by using them, even if at the low-level green entry point, rather than marketing their agency as the one they’ll love so they should use it.

In short – low entry point for prospects – do good work – get referrals – have a low entry point – do good work – get referrals… and move the client from green to orange to red where possible and keep prospects coming into as higher spend zone as possible via referrals.

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