By Ken Ingram
To run a successful and competitive business, it is essential to follow a set of rules, principles and laws. More often than not failure to adhere to rules, principles and laws will culminate in a short yet regrettable business venture. That being said, it is interesting to learn that one of the principles that can have the largest influence on your profitability is being ignored by most businesses.
In 1906 the Italian economist Vilfredo Pareto created a mathematical rule of thumb known as the Pareto Principle that states 20% of something will result in 80% of something? As an example: 20% of your clients represent 80% of your revenues, and the inverse is said true: 80% of your clients represent only 20% or your revenue. As a business owner, the advantage of applying the Pareto Principle in most aspects of your business is the Results you can achieve when your focus is on what matters the most.
To apply this principal you will need to take the time to identify and focus your energy on the 20% that matter. You can expect that during any given day you will end up firefighting, and this saps your time. Hence, you must remind yourself of the need to address first your top priorities. If something, for any given reason, within your schedule slips, or if something is not going to get done, make sure it is not part of that key 20%.
The importance of using this system is to remain focused on ways to increase revenue without working harder. You can make equal or greater income in less time; reduce the stress on the business and your employees equally by working smarter. If you have the option, and I believe that you do, develop a strategy for choosing your customers. This can be done by reflecting upon where you can get the best return on your investment of time, energy and marketing dollars.
Hint: profile the top 20% of your client-base who represent 80% of your revenue by:
uncovering existing ‘marginal clients’ who have the potential to become profitable clients’ and open the door to selling them more products or services;
define what constitutes a profitable client based on the top ten (10) clients who give you the most business each year; and at every opportunity, ask the people in your network for someone to contact who match/meet your criteria.
If you could develop and groom ten (10) more clients just like the ones in your top 20%, you would see a significant jump in your revenue. The process makes perfectly good sense, but very few businesses set themselves up to win by creating a strategy focused on the high payoff group of clients. One of the benefits is that you can now pay more attention and provide WOW customer service to the people who earn you the most profit. I assure you, they will love the special treatment.
So what’s holding you back? Why aren’t you already leveraging your profitable clients and reducing the time you spend with marginal clients?
In reality, you probably cannot convert all of your marginal clients because they may not all agree with your plan. Maybe my suggestion does not even make sense in your business. Yet, I want to challenge you to take a good hard look at where and how you are spending your time. In the event you are hesitant, try at least to determine your real reasons for not pursuing this strategy with a modicum of enthusiasm.
Below are Five Steps to help put Pareto’s Principle at the top of your agenda:
- List all your clients – preferably in a spreadsheet program. Enter the clients’ name, the revenue they generated for your business this year and preceding year. Estimate the average revenue from them over the past five (5) years and the potential revenue for the following year. Is it going up or down? What percentage of your total revenue does this client represent to your business?Estimate the average revenue from them over the past five (5) years and the potential revenue for the following year. Is it going up or down? What percentage of your total revenue does this client represent to your business?
- Sort your columns by the margin of revenue and you should be able to identify a pattern. Who are your profitable clients and who are your marginal clients? If something is changing, what are the reasons?Predict which ones will be in your group of profitable clients next year. Do you have all of their business or are you sharing it with others spas/companies? What percentage of their business do you have now?
- To determine what are the common traits of your profitable clients, consider: a)what types of products or services do they purchase?b)do they have untapped potential? c)what is the strength of your relationship with them? d)and how did they become your client?Also reflect on what benefits your profitable clients are receiving by dealing with you. I suggest that once you have identified this niche group, call and ask them to help you define your business more clearly. Every important client will value the opportunity to help you grow your business and appreciate that you value their suggestions and feedback.
- Look at your marginal client group to see if you have overlooked people who, with some effort, could be moved up into the profitable client category in order to increase the amount of business they do with you.
- Develop a specific plan to give away, or manage your marginal clients in a way that is relative to their business value.
If you react blindly to your customer base and treat all clients the same, then you are definitely working harder – not smarter. Therefore develop a client strategy that enables you to intelligently identify your top clients and spend more time with them and others like them. Are you 20/80 or 80/20?