In the late 1800s, Italian economist Vilfredo Pareto developed a scientific plan that described the unequal distribution of wealth in his country. He noticed that 20% of the people accounted for 80% of the wealth. In the late 1940s, quality management guru, Dr. Joseph M. Juran, referenced the 80/20 concept as Pareto’s Principle, a useful tool to help business owners prioritize and manage their work focus. He determined that 80% of a company’s business’ revenue comes from 20% of its top clients.
In this two-part article, Part 1 will focus on the 80/20 rule and how it can help your business’ productivity. Part 2 (Sept. 12 issue) will feature ways to avoid costly customers.
- Learn how to distinguish between high and low value customers. Procuring new customers can be costly, especially if you’re spending an inordinate amount of time going after dead ends – therefore, the importance of retaining good customers. The key to long-term profitability is to procure a few big clients, who will generate most of your business’ profit (80/20 rule) versus signing on a longer list of small, “low value” customers. Oftentimes the “low value” client wants deals on top of deals, which can drain salespeople, causing a drop in their efficiency and morale. And, yes, this could affect your profit margins.
- There’s a good chance that if you examine your “To Do” list, there may be just a few “important” issues. Of course, we all just love crossing items off our list, but the 80/20 rule suggests that we concentrate on those fewer (but larger) items that will generate substantial returns. Practice this and you’ll be mastering the art of “effective prioritization.”
- Risk comes in different sizes. Focus your monitoring and planning on the risks that have the highest potential of damage. That’s not to say to ignore the others; just be sure to distribute your attention proportionally.
- Keep tabs regularly on your 80/20 clients and replace them with customers who bring higher profits into your business. Some companies “clean house” on a regular basis, effectively releasing the lowest performing clients. This will also allow you to review your goals that are instrumental to your company’s success.
So, the essential point is this: Pareto’s Principle or the 80/20 Rule is a valuable concept when analyzing sales efforts and results. When applied to goal lists, it is an invaluable tool for a systematic outline for many challenges. Use it abundantly, but as with everything else, don’t accept it as an absolute, but instead a guideline.
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- On August 21, 2017