AT&T's application of the Pareto principle to customer segmentation

AT&T

Today AT&T faces a serious dilemma in whether or not to continue a relationship with their least profitable customers. AT&T's customer base today perfectly fits the 80/20 rule first devised by Italian economist Vilfredo Paereto in the 19th century (Krotz). Currently, over 80% of AT&T's revenue is generated by the top 20% of customers. By eliminating the least profitable 80% of customers, the company would make a profit similar to what is currently being seen. This raises the serious question of whether AT&T should consider eliminating these customers from their customer base. In the solution proposed today, this lower 80% of customers would be "sold" or outsourced to other firms that offer higher rates than AT&T.

Advantages

The most obvious advantage of getting rid of these least-profitable customers would be financial. Eliminating these customers would free the company from spending money on maintaining a customer relationship that is not profitable. Company resources could be focused more closely on increasing profit, rather then gaining revenue through these customers. As such, customer service resources could be better focused on keeping the top 20% of customers happy with AT&T. This is especially important, as Krotz notes, the "cost of acquiring new customers... runs 8 to 10 times more than the cost of keeping existing ones." Thus, marketing to existing customers and to potential customers that fit the profile of the top 20% of customers may be a more efficient use of marketing resources than current efforts, which do not discriminate between the top 20% of customers, and the other 80%. As Peebles notes, these lower 80% of customers often waste energy, time and resources; resources which may be better spent on maintaining a relationship with the top 20% of customers.

Recommendations

Given the seriousness of the potential damage to AT&T's image if the company actively decides to "sell" the lowest 80% of customers, another source of action must be considered. AT&T should immediately withdraw marketing campaigns aimed at this lowest 80% of customers, and instead focus marketing on obtaining new customers that fit a profile of the highest 20% of customers. Part of this strategy would be to undertake extensive analysis of the existing top 20% of customers, in order to create a profile of potential top 20% customers. This profile will assist in marketing efforts aimed at these targets (Staples). Further, customer service initiatives should be aimed at retaining the top 20% of customers. At the same time, AT&T should take active steps to avoid alienating the lowest 80% of customers, and continue to provide good service in order to maintain a positive corporate image. Taken together, avoiding alienating the lowest 80% of customers, improving customer service to the top 20%, and marketing campaigns aimed at recruiting new top 20% customers should effectively boost AT&T's profits.