the heavy half

I Googled this marketing term before starting to write, just to see how current it still was.  I got a lot of nonsense about the rear ends of different kinds of trucks.  Nevertheless, I’m pressing on.   …a bit outdated, maybe; but still useful.

The heavy half isn’t about weight, and, strictly speaking, it isn’t about halves.  It’s an extension of the idea that consumption of a firm’s goods and services isn’t uniform across all customers.  Some use more, some use less.  But it may turn out–and very often does–that a relatively small number of customers represent a disproportionately large percentage of company profits.  Those customers are the heavy half.

examples

For instance, in its heyday Nokia sold cellphones encrusted in jewels and/or encased in precious metals, mostly through the Vertu brand.  As I understand it, these high-priced phones accounted for about 5% of unit volume for NOK, but over 20% of profits.

Until very recently, and although the full positive impact was disguised through transfer pricing (most analysts had no clue), a luxury goods customer in Japan might have been worth 2x-4x what an affluent American or European one was.  So sales to Japanese customers might have represented 10% of total revenues, but could have been 30% of profits.

Customers in the midwest drink twice as much Coke as those in California.  Supposedly, 20% of the beer drinkers in America consume 80% of the brew.  In these cases, the heavy half is probably also literally true.

The top 20% of US consumers by income buy about half the discretionary items sold here.  The bottom 20% buys almost nothing.

why it’s important

Any well-managed company knows who its heavy half is.  Most don’t want anyone else to know.  They don’t want to alert the competition, for one thing.  But the heavy half can also be a mixed blessing.  If 20% of your customers buy 60% of your products–and there are thousands of them, that’s great.  If one customer buys 90%, that’s potential trouble if it dawns on him how important he is.

For an investor, discovering a company’s customer/profit profile can be key, especially if you do so ahead of everyone else.  It gives you an inside track to forecasting earnings surprise.

why today

Why am I writing about this today?  I read a Wall Street Journal article about the gambling industry recently that asserted that it has a dramatically skewed profit profile.  According to the newspaper, almost all the income comes from about 10% of the customers.

I think that’s wrong. More tomorrow.