The Pareto Principle (also known as the principle of factor sparsity), or commonly as the 80/20 rule, states that for many events roughly 80% of the effects come from 20% of the causes. In simpler terms, a small percentage of causes have an outsized effect. This concept is important to understand because it can help you identify which tasks to prioritize so you can make the most impact. This principle is best used during the problem-solving process so you can make the best decisions.
The failure of most companies, that you may not be aware of, is not focusing on clients that generate the most results. While it may not be as extreme in all cases as the 80/20 split, there is definitely a clear majority of results that come from a minority of clients.
The strength of a great business is having your revenues and sales coming from a large base of clients. As well, it reduces risk if ever a client leaves, giving you more opportunity to grow sales from within your existing client group.
How the 80/20 Rules Applies To Business and Sales
When you look at your listing of customers, can you quickly identify the customers that seem to take up 80% of your time and create 80% of the problems? They are typically the clients that get most of your time and resources. Meanwhile, the great customers continue quietly along and don’t get the attention they deserve.
“Servicing your existing clients well” is often the easy answer as to how you will grow your business, but it is wrong! The reason is simple – your servicing and attention is usually going to the 20% creating 80% of the issues.
In order to grow a business, you need to be able to allocate your time on those accounts and people that can help expand your sales, introduce you into other great accounts, and move you upmarket to bigger deals. This means you need time to commit to great customers and new opportunities.
How to Focus on the Top 20
Start to look at which clients you could move away from if you had people banging your door down. You know who they are, but you don’t think you can afford to lose them, although you’d like to. These are the C and D grade clients that need to be invited to do business elsewhere.
Reduce the service time to your lowest spending clients and re-focus that time on new sales. These new sales efforts should be around referrals from your best clients (birds of a feather do flock together), as well as adding value to your best clients. Are you making new sales efforts into the open market to choose companies you think would make great clients? You should be every week.
It is true that most companies can cut up to 50% to 80% of their clients, and have it make limited impact on their sales and profits. Now, if your business can’t afford to lose anyone, then you have a more serious problem. So what do you do? Focus on replacing a customer each time you get a new one. Get a new A client and let go of a C or D client. Slowly but deliberately start to change over your client base so they generate more business and less headaches. As a result, you and your team will be motivated to sell someone new, or grow an account just to “fire a client” that drags you collectively down.
It is a courageous move to say you aren’t going to work with everyone. It is also a key decision to more profits and easier sales.
Ways to Measure Customer Profitability and Value
Customer profitability analysis is the process of inspecting your clients and their spending habits. It can be used as a financial performance indicator, and can be used to decide how profitable it is to keep certain customers. When performing this analysis, you may find that the customer group you thought was the most important and most profitable is actually of lower value to your company than customers you haven’t identified yet. In addition, performing customer profitability analysis can improve not only your decision making, but your overall business operations.
There are many things you should measure with your clients and how they interact with your business. Here are just a few to start to know which clients are keepers:
If you want to grow your profits and clients, start asking these questions. Measure who your great clients are, and be courageous about letting the bad ones go.
Combining proven tactics and practical techniques, our sales leaders at Evolve Business Group have helped established entrepreneurs achieve dramatic business results. For more information on how to identify your most profitable clients, email firstname.lastname@example.org, or call +1-403-836-3023 and book a free consultation today.