Don’t Forget The “80/20″ Rule
Posted on 01. Oct, 2009 by Steve Young in Business Optimization, Small Business Marketing
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Do you ever notice how of all your customers, typically you’ve only got a few that cause you problems…but boy do they cause problems!
No doubt you’ve heard of the 80/20 Rule, which is actually another name for what was originally called the Pareto Principle.
The gist of the Rule is that 80% of your results will come from 20% of your efforts, and likewise, 80% of your problems will come from 20% of your customers.
The question I love to pose to business owners is, “How can you use this principle to your advantage in your business?”
There a few major ways you can use this principle to your advantage in your business:
- Fire the 20% of your customers that give you more problems than profit.
- Look, the headache you incur just to keep these people happy isn’t worth what little they bring in for you. It’s in the best interest of your sanity and energy level to just let them go – they can go cause someone else problems. You won’t even notice the fact they’re gone when you look at your balance sheet.
- Focus on the 20% of your customers that bring in 80% of your profits
- These are your good customers that are a joy to work with and that come back to buy from you repeatedly (which is what you ultimately need if you want to make any real money).
- You’ll have more free time to service them now that you’re not messing around with the lower 20% that was wasting all your time and energy!
- Realize that the 80/20 Rule applies to your top 20% all over again
- What this means is that when looking at your top 20% of customers (let’s say there are 20 of them for easy math), 20% of those 20 equals 4 customers. And if those 4 customers (20% of the top 20%) are responsible for 80% of the profit from the original 80%, that means those 4 customers are responsible for 64% of your total profits! (80% of 80% is 64%)
- So if your net profits were $100, 4 customers will statistically be responsible for $64 of it!
Once you’ve identified your best customers, be sure to create incentives and preferred customer programs to keep those top 20% and top-top 4% happy, loyal, and evangelistic customers for life and you’ll enjoy higher profits, less stress, and an overall better quality of life.
Many times owners of small businesses have a hard time letting go of that lower 20% of their customer base, thinking that they’ll make more of an impact than they actually will, myself included.
But I speak from experience when I say, “You won’t notice a dime of it!”, and the peace of mind that comes from not having to deal with yet another email or phone call about issue #3,467 is a wonderfully liberating thing!
Try it – I promise you’ll love it.
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