The 80-20 Rule… and When To Break It!

by | Feb 15, 2019 | Operations

Ah, the good old 80-20 Rule… The saying “Rules were meant to be broken,” certainly applies here. It’s one of those things that can seem like a positive or a negative depending how you look at it. Similar to the, “Is the glass half empty or half full?” question, your view of The 80-20 Rule is all about perspective and making sure yours is aligned with the goals of your business.

Perhaps it’s frustrating that 80 percent of your efforts account for only 20 percent of your bottom line. But, it’s also pretty cool that just 20 percent of your customers and products produce 80 percent of your profits.

It’s all about balance. And, as you find that equilibrium, you need to know when to reconsider The 80-20 Rule:

1.When More Selection is Required

There are times when one size does not fit all. You may provide the best gosh darn spicy mustard the world has ever tasted, but sometimes a spicy mustard isn’t the right mustard choice. There are circumstances when a classic yellow mustard is preferable. Or maybe there’s a recipe that calls for a Dijon mustard…

The point being: There are complexities that require consideration and adjustment on your end. That might manifest in a variance in investment strategies, production process, or product offering. Small tweaks to your 20 percent can result in a major boost in profit.

2.When The Present Does Not Reflect The Future

While a company’s best product and most loyal customers will consistently account for a higher percentage of sales and profits, there are instances when those factors are not reliable in the long run. Sales may drop as necessity decreases and/or newer products/services become available. Competition is always a factor and, during a time when technology constantly and rapidly changes, your current best seller may not always be in high demand.

If you only focus on what’s doing well now, you’re bound to experience adversity in the future. If you rely to heavily on one thing, you inhibit potential growth. There is a simple need to develop and test new products to advance and survive.

3.When Expansion Creates Opportunity

Opportunities to expand your market will arise and the investment may not be a part of your current 80 percent. These instances are worth serious consideration—especially when the investment is minor. You may open up the door to a broader 20 percent. For example, babies’ diapers are still the major market segment, but adult diapers are the fastest growing segment. Expanding your offering (this may include accessories, convenience items, or new market segments) can draw in a wider customer base and that is never a bad thing.

One last thing to consider: Diversity Requires Variation

Many markets rely on analysis, which is based around the assumption of a bell curve where the bulk of a population is around a center number and then distributed evenly around that number. For example, the average U.S. adult male is about 5 foot 9 inches and 75% are between 5 feet 4 inches and 6 feet. However, if you start segmenting by age, race, ethnicity, and country of origin the distribution becomes much more complex. The average Danish man is almost 6 feet tall while the average male from India is 5 feet 5 inches. In both cases using an average of 5 foot 9 inches would miss much of the population. 

Therefore, it is beneficial to dissect your target consumer and consider multiple offerings based on the possible variations that exist within that group.

In the end, The 80-20 Rule is still a reliable tool in most cases, especially when trying to eliminate excess product or hone in on top buyers. However, as always, exceptions to rules always seem to be where the fun happens—the chance to maximize growth as you reassess opportunities, trends, and market segmentation.

We’d love to hear about your experience improving business performance by adding or reducing offerings.

Have questions? Call (at 914-632-6977) or email us for a FREE analysis and discussion regarding your offerings. We’d love to help you design a personalized solution.

A customized approach that caters to each of his clients’ specific needs is what sets Dr. Bert Shlensky apart. With a PhD from the Sloan School of Management at M.I.T., he focuses on implementing individualized strategies that have helped countless businesses increase sales and profit. He knows what works and has the experience and expertise to help you take the steps necessary to achieve your business goals.  Visit StartupConnection.net today!

Prioritizing is Easy With the 80/20 Rule

by | May 17, 2018 | Marketing

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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?
  5. 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.
  6. 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.
  7. 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.
  8. 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.