Curing the Pareto Illness

By Brendan B. Read, Senior Contributing Editor  |  November 01, 2010

This article originally appeared in the November 2010 issue of Customer Inter@ction Solutions

One of the most serious illnesses to strike organizations is the Pareto Principle: the notion that 20 percent of customers create 80 percent of the value, which is embedded in CRM methodology. To maximize profits the object is to focus resources on retaining and attracting the top 20 while giving minimal least-cost service to the bottom 80.

The Pareto Principle offers firms short-term gains through cost reductions while building greater loyalty and hopefully revenue from elite buyers. Yet it inflicts the medium/long-term pain from rising expenses, shrinking customer bases and individual income and spending declines.

The Pareto Principle’s symptoms include poorly-written IVR and web self-service that it forces the lower 80 percent of customers to endure and who then reach live agents only after enduring lengthy queues: only to be pushed through the calls by agents that are being measured to average handle time and cost per call.

Another warning sign is the lesser 80 percent of callers having their contacts handled offshore. Companies have got the message that the top 20 percent will not tolerate agents who cannot understand and help them in a timely manner; they now stay domestic, served by in-house or at high-end boutique outsourced centers: with short or no IVR menus and minimal queues.

The Pareto thinking may now be infecting the social channel by solving customers’ problems through solely or principally using onsite communities. The seeming ROIs are lower costs: why pay for support when the “social nation” can provide this assistance for free? Yet social-based support is risky because customers could employ the wrong information that can mess up their products, which will not make them happy.

Don’t be surprised if firms begin charging customers for support by professional staff akin to the paid plans for mid-to-high-end business software: free (of course), to elite buyers.

There are only so many of that top 20 percent to go around, and these buyers know it and are demanding firms to woo them with new offerings. Meanwhile the other lower 80 percent of customers represents volume, and infrastructure—hardware, software and services--are volume buys. And the 20 percent in value they bring to the table can make the difference between profit and loss.

With products and service becoming equal and commoditized, service becomes the only differentiator. But when service quality disappears for the majority of buyers then why they should stay committed to those firms? The net impacts are even less revenue: and higher costs from more marketing to keep them too. Shrink the total demand and the cost per customer for technologies and services skyrockets.

The Pareto Principle has also poisoned the call floors. Agents are at the bottom and are underpaid, with little in the way of benefits, have limited schedule flexibility and must deal with often-incompetent supervisors and managers. There is now a push to turn more agent positions from full-time to part-time mainly to cut benefit expenses. At the same time the top 20 percent want agents which have high-end comprehension, knowledge, empathy, superior speaking, grammar and writing skills to meet their needs. Yet how will contact centers attract and keep high quality employees if they do not treat them well? How can they in turn be customers if they do not have adequate wages?

There is a painful but necessary cure for the Pareto illness. Firms must put their wants on strict diets and instead spend more money to improve service to elite and non-elite customers alike. That means more live agent care and focus on retention metrics such as first contact resolution. They should also boost contact center wages and benefits, avoid part-timing and improve working conditions including bringing aboard quality supervisors.

These investments will encourage all customers to stay loyal and become fans, advising others via their social media posts to become buyers too, which reduces costs and drives up income. They will also make staff more productive, less likely to churn and more willing to recommend employment there to other high quality workers.

Call this approach the capitalistic version of spreading the wealth. And it is the only way which we can cure our economic ailments.

Brendan B. Read is TMCnet’s Senior Contributing Editor. To read more of Brendan’s articles, please visit his columnist page.

Edited by Stefania Viscusi