The 80/20 Rule to Focus on Your Best Customers
Have you heard of the 80/20 rule?
Also known as the Pareto Principle, the 80/20 rule states that 20% of your activities generate 80% of your results.
You can take this rule and apply it to almost any situation. For our purpose we’re going to apply it to customers, meaning that 20% of your customers generate 80% of your income.
A brief history
The 80/20 rule was named after the Italian economist Vilfredo Pareto. In 1906 Pareto observed that 20% of the pea pods in his garden accounted for 80% of his pea crop each year. He then expanded this principle by showing that 80% of the wealth in Italy was owned by 20% of the population.
You can argue that the 80/20 rule is totally hypothetical, but when it comes to business, this simple hypothesis can help you identify who your most profitable customers are.
How to find your 80/20 customers
The first step in working with the 80/20 rule is to carry out an analysis of your customers:
- Determine your total sales for last year or last quarter
- Run a report of total sales by each customer or account
- Identify the individual customers who account for the biggest percentage of your sales by dividing the total customer purchase into total sales for the period
These remaining customers are your top 20%. They trust you, enjoy your products and services, and are most likely to buy from you again and again.
The reality of applying the 80/20 rule in your business
If 20% of your customers account for the vast majority of your total revenue, is there any logic in giving every one of your customers the same amount of your time and energy?
The answer for the most part is no!
It’s not worth spending equal amounts of time on the customers who generate less income. All that will achieve is you being busy without maximising your returns.
Treating all of your customers in the same way only leads to “busyness” and the reality is they’re not all the same. This may sound a little hash but it doesn’t change the truth of the matter.
Some clients require more time and warrant being prioritised, because they’re the ones generating more revenue and longer-term business opportunities.
Remember, 20% of your customer base is invested in what you have to offer, and are just waiting for you to follow-up with them and ask them to buy from you again or offer them something new! By not doing so, you’re just leaving money on the table!
For more tips, ideas and exercises using the 80/20 rule, plus other great business strategies, click here and download your free copy of our “Top Tips & Ideas for Business Growth” eBook.
