The original concept in 1908 by Pareto was that 20% of the population controlled 80% of the wealth. In the modern business realm, it has been proven time and time again that 80% of business revenues are generated by just 20% of our customers. Yet we all continue to waste time, money, and inventory dollars on customers that bring in a lower return. This tendency also frequently adds confusion and complexity. At StartupConnection, we help our clients prioritize.
While much of following the 80/20 rule is focused on analytics, the most important (and sometimes simplest) way to keep existing customers happy and is to exceed expectations. As Walt Disney said, “Do what you do so well that they will want to see it again and bring their friends.” Satisfied customers, repeat customers, positive social media, and referrals are the best and least expensive marketing a business can have. There is no substitute for a satisfied customer. In contrast, dissatisfied customers, poor service, and negative referrals can offset even the best marketing efforts.
Some specific examples of using the 80/20 rule with my own clients:
- We helped a number of businesses create sharing sites for parties, home services, programming etc. While the concept is relatively simple, the cost of finding suppliers and developing marketing programs can be both expensive. I have been successful in encouraging these businesses to focus on the services that have the most potential.
- We helped a textile company prioritize its product offerings; at first they were focused on being all things to all people. We worked on developing groups of products, increasing design and marketing efforts, and eliminating over 40 % of the products (which represented less than 10 % of sales.) The result was greatly improved efficiency, but more importantly, the ability to add products by more integrated merchandising.
- Prioritizing and following the 80-20 rule can be easily improved by just taking care of your best customers. For example, why do new customers sometimes get better discounts than the best old customers? I encourage clients to treat the best old customers really well, in addition to seeking out new customers.
Here are some tips to consider when executing the 80/20 rule:
- Reduce inventory. By following the 80/20 rule, you’re choosing to operate using less inventory. You must first admit that certain products (even if you truly believe in them), simply are not selling. This leaves more room for carrying the products that do sell.
- You should spend your resources on what you know will provide a return on your investment. Reducing products that may or may not be a good fit for your customers can save you money. Also, think of all the headaches, space and time you’ll save by not having to market obsolete inventory.
- The 80/20 should not preclude development and testing of new products. However, this usually requires more analysis of the program, evaluation of results, and withdrawal if success is not apparent.
- Simplify products and services. Your customers will also appreciate this. Think about the last time you went to the store to buy one simple thing, and you saw enough options to fill a late 1980s Sears catalog up. It made it difficult to choose the right product, didn’t it?
- By focusing on the products that you know your customers want, you’re making them feel much more confident (especially when you’re selling online.) Instead of finding new ways to market products that simply aren’t selling, you may be better off to shift over to what is selling. If you give people what they’re searching for, they’ll buy. If you don’t, they won’t. It’s that simple.
- Have you run an unsuccessful AdWords campaign lately? It may be the actual product or service that you’re marketing and not the ad. If you’ve followed every best practice and your product isn’t selling, maybe you have to blame the product, and not the ad.
- I know you hate developing complex forecasting models and spending lots of administrative time on the logistics of obsolete products, but you’ll get over it. Who knows? You might even find some more leisure time.
- Suppliers also like the 80/20 rule, and they may reduce prices or increase service if their orders are more concentrated. Everyone in the supply chain, right on down to the customer, is much happier as a result.
This brings me to my next point… what is the MOST important reason the 80/20 rule works? Happy Customers! Want to start rocking your business by following 80/20? Contact me and I’ll get you started!
Dr. Bert Shlensky, president of Startup Connection ( www.startupconection.net ) has an MBA And PhD from the Sloan School of Management at M.I.T. He served as the president of WestPoint Pepperell’s apparel fabrics business and President and CEO of Sure Fit Products. Having provided counseling to over 2,000 clients, he now focuses on working with select startup and small businesses.