What is the 80/20 Principle?

20% of your input results in 80% of your output or 80% of your revenue comes from 20% of your customers

If you plan to use the principle, note that it is not a one off process – it is a brand new way of looking at your business that requires hard work and big decisions.

The 80/20 Principle is based on data and in the end shows you how to do simple things in a spectacular way, as Peter says.

First, put your customers in descending order of revenue and break them into four quartiles like the chart below shows. When you calculate the percent of revenue, overhead and net profit that each of your customers represent, you’ll see each quartile breakout in approximately the same percentages as below.

Do your percentages match the above chart? What does that tell us? The striking message here is that half of your customers are generating only 4% of your revenue and at the same time, they are half of the money you spend on overhead and you lose profit on them. At the same time, your top customers are giving you the majority of your profit and revenue.

The 80/20 Principle defines your largest customers as whales and the bottom half as minnows.

Now that you have your customers divided into whales and minnows, what do you do with them?

Treat them differently.

At the end of the day, your whales are bringing you the best business and in many ways, your minnows are making your business less efficient. Treat these customers differently. Treat them fair, but not necessarily equal.

Ideally, whales should be raving fans of your product or service. What else can you do for them to make them happy, satisfied customers?

Minnows can still be customers but you’ll want to put terms on your business with them. If they ask for something, your response is “yes, but”. Yes you can deliver that product but will cost more or it will be a longer wait time. You can even double the price of your product or service for your minnows. Keep doubling the price until they stop paying. If they leave and go to your competitor, this is not a bad thing. Minnows are costing you time and money. Therefore, they should either pay for that time and money or not be your customer anymore.

It is important to communicate these terms and conditions to your sales and customer service teams. Understand that these terms and conditions are not to be applied to your whale customers. Your team should know when these policies should be executed and when they shouldn’t be. You don’t want to lose a whale customer.

Get more whales.

Now that we’ve established that whales drive your business, you probably want to get more whales, right? The best way to achieve that goal is through target selling. Identify your 10 Most Wanted Whales (these can be ‘baby whales’ – existing customers that have the potential to grow – or prospects). Focus on getting the right customers, apply the right resources (i.e. salespeople) and reward them appropriately. Click here to download the Customer Acquisition Form to help you focus on your potential whales.

The key to successfully utilizing the 80/20 Principle is understanding your data, simplifying your products/customers and automating your process while adding more of the right customers and products.

Apply 80/20 to your product line.

Thinking of adding a new product or service? Click here to download 25 questions you should ask yourself before starting product development.

Good luck!

If you would like more information on the 80/20 Principle or some assistance putting your data together, please reach out to Peter Philippi.

Strategex, Inc.
20 S. Clark, Ste. 2400
Chicago, IL 60603
312.551.0505
peter@strategex.com

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