How to stop picking up peanuts while the elephants march by
19 December 2016
Would you believe that:
- 80% of your sales come from 20% of your customers,
- 80% of your purchases come from 20% of your vendors,
- 80% of your HR problems come from 20% of your employees?
If not, take a look around! Better yet: run the data on your business to prove it.
This theory isn’t new. It’s the principle of imbalance, developed in the late 1800’s by an Italian economist, Vilfredo Pareto.
The 80/20 rule can be applied to virtually everything. A great example is your kitchen: you use 20% of the pots/pans/utensils in your kitchen to prepare 80% of the food. Is your kitchen organized accordingly, or is your fruit cake pan given the same priority as your everyday casserole dish? In business, 80% of our results come from 20% of our inputs. Such can be applied to many areas of the business: quoting, mistakes/defects, warehouse organization, sales team alignment, transaction processing, etc., etc.
This all seems obvious, right? The problem is, most businesses don’t know who or what the 80’s are. And, if they don’t know who/what the 80’s are, it’s hard to know where they’re making money and how to align themselves appropriately.
Understanding the 80/20 principle allows you to treat your best customers better, ensuring that your top customers aren’t subsidising the others. In return, these customers become raving fans of your business, and your profits improve when they spend more.
For example, the 80/20 principle can be used to revamp your sales efforts. If you analyse where your growth is generated, you will find that 80% comes from your existing customers which account for 20% of your total customer base. Do you know who those customers are? Find out and spend the time getting to know them better than they know themselves. Then, do the same for your top prospects.
Through the discovery process, one of our clients realized that over 100% of the current company profits were being generated by their top customer, a large domestic OEM. After finding this, they re-aligned all departments ensuring they were over-serving this account. Within six months, the account was happier, much more secure and buying more.
Not only do businesses using 80/20 enjoy extremely satisfied customers, but, also, our clients are able to find time, literally. When introducing the 80/20 principle, one of our advisors points out that “a vast majority of what you do is poorly conceived, poorly executed and beside the point.” To put it another way: 20% of your efforts produce 80% of your results, therefore, you’re wasting a majority of your time in any given day. The challenge is to identify those things that you must do well, never fail at them, and do less of the things that don’t contribute to the overall outcome. In some cases, it is possible to eliminate low contributors altogether. In return, you’ll win time for your business, and yourself.
The 80/20 process can be applied to you and your client’s products, services, customers, employees, vendors, policies, and facilities. We work with clients to help them apply these principles to improve their businesses. By making 80/20 thinking part of their routine, they focus on the critical few things that really matter to their clients, their business, and their lives.
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