What is 80/20 Rule and How can it be Used to Grow My Business?
Brad- I hear about the 80/20 rule all over the place, but I’m not really sure what it means. It just doesn’t make sense to me. Can you explain the 80/20 rule in detail and tell me how I can use it to grow my business?
Basically, the 80/20 rule or the Pareto Principle means that 80% of your business comes from 20% of your customers.
Pareto observed in 1906 that 80% of the land in Italy was owned by 20% of the population; he developed the principle by observing that 20% of the pea pods in his garden contained 80% of the peas.
Of course, 80/20 aren’t hard and fast numbers. For your business the ratio might be 70/30, but the principle is the same, it’s up to you to figure out the exact numbers for your business, but it basically works like this:
In business there are four types of customers, A,B,C and D. Your A customers always pay on time and never haggle about price. They refer customers to you and they come back on a regular basis.
Your B customers are working toward A status. Your C and D customers are the bad ones. They are constantly complaining, try to lower your prices, place unrealistic pressures on your time and even pay you late.
Knowing this is the case, you need to do two things with your customer base. You need to lavish your top 20% of customers with attention and great service, while spending less time chasing the bottom 20% who create 80% of the complaints about your business.
For example, when I was still coaching individual businesses, I worked with an insurance company. They weren’t doing as well as they would’ve liked and they had a lot of customers.
I asked them to draw up a list of their customers, from best to worst and then I drew a line separating the top customers from the bottom 80%. I told them to “fire” those customers and at first the management of that insurance company thought I was crazy. They couldn’t just give up customers they thought.
Finally I convinced them to sell those customers to their competition and focus on that top 20%. Guess what happened? They had their most profitable year ever. Why? Because they were able to offer more to the good customers they had.
Profits from add on services grew exponentially and they had more time to devote to customer service and keeping their happy customers just that, happy.
Remember, there are people out there who appreciate good service and are willing to pay for it and there are people who enjoy creating misery for others.
The key to using the 80/20 rule is to understand which is which for your business and cater to those who appreciate your value.
Imagine how loyal your customers would be if you spent 80% of your time looking after their needs. Often business owners get it backwards.
They spend too much time trying to make the perpetually unhappy customers happy and get complacent with the satisfied ones. That is a sure way to build a struggling business. Focus on your best 20% and your business is sure to see rewards.
All the best,