This post focuses on leveraging Pareto Analysis in product management. We will discuss how to use Pareto Analysis to understand product line revenue trends as well as customer support activity. The results will help product managers to narrowly focus their resources to have the maximum impact on revenues, profitability, and customer satisfaction.
The Pareto principle (also known as the 80/20 rule, states that, for many events, roughly 80% of the effects come from 20% of the causes. Management consultant Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who noted the 80/20 connection while at the University of Lausanne in 1896. In product management, the Pareto principle is an excellent tool for understanding product line revenue trends.
Consider the following table:
By dividing customers into tiers based on a range of annual revenues you can see that only 44.8% of the customers account for over 90% annual revenues. Conversely more than half of the customers account for only 8% of total revenues. Focusing on the subset of higher revenue customers will inevitably result in better revenues and profitability for the enterprise.
Assuming these revenues are associated with a SaaS offering, it is important to drill down another level to really understand what is going on. Product Managers need to understand monthly customer revenue trends. Specifically which customers grew their revenues, had flat revenues, declining revenues, attritted (canceled), or were net new customers. Consider the following table:
This table shows a product line with some trouble. While new customers are more than offsetting customers that cancel, the existing customers net revenue trend is negative. Monthly revenues are declining more than they are growing.
By adding in revenue tiers to the analysis, you can identify where to bulk of the challenges are:
As the table indicates, the bulk of attrition is narrowly focused in customers whose revenues are greater than $25K/year and less than $50K/year. The same is true for customers with declining revenues – customers with greater than $50K and less $100K in annual revenues account for the vast majority of declining revenues. By focusing on these two sub segments of the entire customer base product managers could significantly mitigate downward revenue trends. Conversely, focusing on the 73 net new customers could be the key to significantly growing revenues.
Similar analyses can be conducted on customer support activities. This would enable product managers to focus development and support resources to mitigate declining and attritting revenues. Consider the following table:
The table shows a pretty typical distribution of customer support ticket types, with How To tickets being the most frequent type of ticket. It is also helpful to look at distribution by revenue tier:
When you examine the same data, but from a revenue perspective, something significant pops out:
While billing problems account for almost 9% of all problems, they impact almost 23% of annual revenues. Clearly that is an area that can be focused on.
When we zero in on customers whose revenues declined or cancelled we can see where their biggest pains are as well:
Pareto analysis can provide significant, actionable insights into how Product Managers can focus their energies to increase revenues, profitability, and customer satisfaction. All you need is some data dumps from accounting and customer support system, Excel, and pivot tables. If you would like a copy of the spreadsheet that was used in this post, click here