Are you 20/80 or 80/20?
by Ken Ingram
President of TAC-Coaching
To run a successful and competitive business it is essential to follow a set of rules, principles and laws; more often than not failure to do so will result in a short and regrettable business venture. That being said, it’s interesting to learn that one of the laws that can have the biggest impact on your profits is being ignored by most businesses. Are you aware that in 1906, Italian economist Vilfredo Pareto created a mathematical rule of thumb that states 20% of something will result in 80% of something? As an example 20% of your clients represent 80% of your revenues and the inverse is also true: 80% of your clients represent only 20% or your revenue. It’s come to be known as the Pareto Principle, and if you’re not employing it, you probably should be.
As a business owner, the value of applying the Pareto Principle in most aspects of your business is that it should remind you to focus on the 20% that matter the most. You need to take the time to identify and focus your energy on that group because during any given day you’ll end up fire fighting and this saps your time. So you must remind yourself that your top priorities always need to be addressed first. If something in your schedule slips, or if something is not going to get done, make sure it's not part of that key 20%.
The importance of using this system is to remain focused on ways to increase revenue without working harder. You can make equal or greater income in less time, reduce the stress on the business and all your employees by working smarter. If you have the option, and I believe that you do, develop a strategy for choosing your customers. Reflect upon where you can get the best return on your investment of time, energy and marketing dollars.
So what can you do? Profile the top 20% of your client base who represent 80% of your revenue by:
• Uncovering existing ‘marginal clients’ who have the potential to become profitable clients’ and open the door to selling them more products or services.
• Define what constitutes a profitable client based on your ten clients who give you the most business each year.
• At every opportunity ask the people in your network for someone to contact who match your criteria.
If you could develop and groom 10 more clients just like the ones in your top 20%, you would see a huge jump in your revenue.
So what's holding you back? Why aren't you already leveraging your profitable clients and reducing the time you spend with marginal clients?
The process makes perfectly good sense, but very few businesses - set themselves up to win by creating a strategy focused on the high payoff group of clients. As a bonus you can now pay more attention and provide WOW customer service to the people who earn you the most profit. I assure you, they’ll love the special treatment.
In reality, you probably can't convert all of your marginal clients because they might not all agree with your plan. Maybe my suggestion doesn't even make sense in your business.
• But I challenge you to take a good hard look at where you are spending your time. If you are hesitating, determine your real reasons for not pursuing this strategy with enthusiasm.
Below are five steps to help put Parato's Principle at the top of your agenda:
1. List all your clients - preferably in a spreadsheet program. Enter the clients’ name, the revenue that they generated this year and last year. Estimate the average revenue from them over the past five years and the potential revenue for next year. Is it going up or down? What percentage of your total revenue does this client represent for your business?
2. Sort your columns by the margin of revenue and you should be able to identify a pattern. Who are your profitable clients and who are your marginal clients? If something is changing, what are the reasons? Predict which ones will be in your group of profitable clients next year. Do you have all of their business or are you sharing it with others? What percentage of their business do you have now?
3. To determine what are the common traits of your profitable clients consider:
a. What types of products or services they purchase?
b. Do they have untapped potential?
c. What is the strength of your relationship with them?
d. How did they become a client?
Also consider what benefits your profitable clients are receiving by dealing with you. I suggest that once you have identified this niche group, call and ask them to help you define your business more clearly. Every important client will value the opportunity to help you grow your business and appreciate that you value their suggestions and feedback.
4. Look at your marginal client group to see if you've overlooked people who, with some effort, could be moved up into the profitable client category in order to increase the amount of business they do with you.
5. Develop a specific plan to give away, or manage your marginal clients in a way that is relative to their business value.
If you react blindly to your customer base and treat all clients the same, then you are definitely working harder - not smarter. Therefore develop a client strategy that enables you to intelligently identify your top clients and spend more time with them and others like them. Are you 20/80 or 80/20?