All businesses, whether they like it or not, have to live with the phenomenon called the 80/20 Rule. It is not a “rule” in the sense that it was passed in the House of Commons. It is named after its discoverer, Italian economist Vilfredo Pareto.
The basic rule as applied to business activity is: 80% of the results come from 20% of one’s activities. In business, the 80/20 Rule can be applied in many different ways:
PRODUCTS
80% of the business will be done on 20% of the selection of products or services.
The logical thing to say is that if this is so, then why carry or offer things that don’t sell often or don’t sell at all? – “logic” would say to get rid of the some or all of the 80% that doesn’t sell or sell well. This is “fuzzy logic,” because if the overall selection decreases, the ratio still holds true and it will have a negative effect on the 20% that does sell well.
Better, “unfuzzy logic” says it’s better to look for ways to increase the sales of things that sell slower or don’t sell. If successful, it will help increase overall sales and, since the 80/20 Rule is a ratio, the sales of the better selling products or services will also increase.
SALES PERIODS
80% of the business will be done in 20% of the time (year, month, week, or day).
Some firms decrease the number of employees on hand during the slow times. This is possible, if looked upon as a yearly or weekly thing (as some days in many businesses are traditionally slow) as long as one has a trained staff or someone that can be called in when needed.,
However one should always be looking for ways to increase profitable sales during slow times since this would increase sales in general and will cause the busy times to be even busier.
SALES PEOPLE
80% of the sales come in from 20% of the sales staff.
Investigate the sales records. Look at each sales unit, their sales value and the time spent.
Virtually every industry will find the 80-20 rule to be a fact.
So, fire the ones that are not producing?
But remember it may not be the fault of the salesperson. It may be the fault of how the territories are set up, poor training, inept marketing, targeting the wrong markets or many other reasons. Every element must be investigated. The investigation of the actual sales per individual customer may shed light on some areas of improvement..
MAJOR CUSTOMERS
80% of sales will be done with 20% of one’s customers.
It is widely practiced that businesses divide their customers into A, B, and C categories by the amount of business these customers generate. Often, it is the A customers that do the most and are highly targeted by the sales & marketing departments, while B customers are treated half-heartedly and C customers are almost entirely ignored. What is also well known is that in a 10 year period many of the A customers become C customers or go out of business and C customers develop to be A customers.
And so it continues:
COMPLAINTS
80% of the complaints come from 20% of the customers.
CUSTOMER BASE
80% of the customers will come from 20% of the area the business reaches.
This particularly applies to distributors, franchises and sales territories.
It’s often true that customer/ prospect databases demonstrate the same ratio.
ADVERTISING
80% of business from advertising will come from 20% of the advertising.
EMPLOYEES
80% of the work will be done by 20% of the employees.
Top salesman dominate but often resent covering the average contributors
MEETINGS
80% of the important information/discussions happen in 20% of the meeting time.
A lesson here is to use sharp short meetings with deadlines and focus on specific areas of discussion.
PROFIT
80% of the profit comes from 20% of the sales or 20% of the customers.
This is a very similar analogy to the major customers.
There is more to these ratios than meets the eye when first read, but having the knowledge of how these ratios affect business can be put to good use. A good salesman knows these ratios and surveys his market prospects regularly, often being ruthless in his quest for the optimum.
