The ‘Long tail’ is a graphic recognition of the Pareto principle, the 80/20 rule. It holds true in every situation I have ever seen. Rarely exactly 80/20, but always somewhere in the region.

We tend to accept it as a reflection of revenue and profit: ‘20% of our customers generate 80% of our revenue’.

Often, we manage our businesses, particularly the sales effort, as if this is the only place the principle works.

It applies equally to transaction costs, long term potential, management attention, geography, product class, customer type, and many other useful to know indicators.

Take for example, those customers that in 5 years’ time will be amongst your most profitable. Chances are, they are currently hiding somewhere in your long tail, denied the focus and assistance they might value that will assist them to grow in importance, simply because they are not seen. I call them ‘Strategically Important Customers.’ Unimportant now by most measures, but critically important in the long term.

Ignore these customers at your peril.

So, how do you find them?

• They meet the parameters of your ‘ideal customer.’
• They have a problem to which you have or are developing the ideal solution.
• Your share of their ‘wallet‘ is low when they meet other ‘ideal customer’ parameters.

Conversely, set your sales team to dig them out of your competitor’s long tail, deliver value to them, and convert.

An equally important task is to identify those customers who cost more to service than their current or potential profitability. The best thing you can do is send them to your competitor, so they can be saddled with the usually hidden transaction costs and low margins.

The profit and Loss statement is, or can be, a remarkably efficient way of capturing the information required to focus resources in the most optimised manner, dictated by your strategy. A P&L by customer, product, geography, market, and any other driver can be generated using readily available and relatively simple tools. The challenge is in overcoming the institutional definitions of how the data for the statements is collected, collated, and presented.

For example, what is an overhead, and how is it allocated?

In a factory, is the cost of supervisory staff allocated to individual product lines based on the actual costs, some rough ‘standard’ cost, or not allocated at all? Are those costs seen as overhead? Is the total overhead spread across total production by some magical formula devised by the accountants, or treated as a cost centre and managed proactively? What about those directly on the production line? Are their costs allocated in proportion to production volumes, customer offtake, or some mythical ‘absorption’ rate?

Take the time to ‘slice and dice’ your Profit and Loss statement. After having tackled the greater challenge of having the costs as they are actually incurred reflected in the customer P&L statement, you will be in a great position to take decisions that will have a significant impact on your overall profitability.

Related posts:

How to manage price for optimum profit. Two sides to the flow of cash. 9 questions to determine customer centricity. A marketer’s explanation of EBITDA