The 80/20 rule (also known as the Pareto Principle) suggests 80% of your revenue comes from 20% of your customers.
While 80/20 is the most commonly found ratio, the Pareto principle may also exist in other similar ratios, such as 70/30, 75/25 or 85/15.
In essence, they all show that a low percentage of causes affect a high percentage of results:
80 percent of your results are a product of 20 percent of your time invested.
80 percent of your sales come from 20 percent of your customers.
80 percent of your complaints come from 20 percent of your customers.
Viewed in this way, then it might be advantageous for a company to focus on the 20% of clients that are responsible for the 80% of revenues and simply market specifically to them — to help retain those clients, and acquire new clients with similar characteristics.
Do an analysis – group your customers together by “family” and related entities and see how closely this applies to your business.
The benefits of using the 80/20 rule.
The 80/20 rule can help you identify where the majority of your time, money or energy is best spent.
Using the 80/20 rule, you can determine achievable goals and outline specific tasks to reach them and stay focused on what makes the most impact.
By identifying tasks that yield the most results, you can organize your day to focus on tasks that have the most significant impact on your work.
Applying the Pareto Principle to customer relations can help you identify how to best interact with clients and understand how they affect business.
More so, applying the 80/20 rule to business matters can help to streamline the company’s business model and to invest in the people, products and systems that offer the biggest returns.
Find your best customers.
Your best customers are often the ones bringing in most of the profits. Identifying the 20 percent of customers who are purchasing most of your products or services can help you develop marketing strategies to attract more like-minded customers. Here are some ways you can discover your best customers:
Twice a year, get your team together and ask each person to nominate one, two or three customers for expulsion.
However harsh it may seem,these “bad” customers tend to have certain common characteristics:
- They are unprofitable or marginally profitable
- They argue about prices
- They are slow to pay
- They are high-risk
- They complain a lot
- They are slow to respond to requests
- They don’t refer new customers
- They have unrealistic expectations
- They abuse team members
- They are rude
Here’s an exercise to try and apply the Pareto Principle. It’s called the Biggest Check Exercise. Here’s how it works:
- On a chart, list your 5 best customers (however you define that term)
- In column A, enter the total revenue you generate annually from each customer and calculate the total of the column
- In column B, enter the total revenue you could generate if you sold each customer your complete range of goods and services. Now calculate the total
- Compare the column A total with the column B total and ask yourself, “How should we change the allocation of our marketing and other resources?”
Learn to manage your costs.
You can use the rule to identify the 20 percent of items responsible for 80 percent of your company’s expenses and reduce costs if possible. By identifying where you spend the most money, you can make smarter budget decisions for your business.
Invest your time wisely
When looking at your business goals, prioritize your time on the 20 percent most important ones that may bring in 80 percent of your sales or revenue, then you can focus your remaining time on the rest of your goals.
Watch where traffic is coming from.
All websites receive traffic from many sources, but it’s important to find the 20 percent of sources that 80 percent of your traffic is coming from. Instead of monitoring all your traffic channels, focus on five to 10 traffic channels that are bringing in the most referrals and you can concentrate your posts there.
You get the idea …….