The 80/20 principle is a powerful tool that can be used in many ways. This is the time of year to employ the 80/20 principle to help focus your planning for 2009.
The simple applications of the 80/20 principle tell us that, typically:
80 percent of our sales come from 20 percent of our customers
80 percent of our profits come from 20 percent of the products we offer
80 percent of productivity comes from 20 percent of our efforts, etc.
Now these numbers might end up being 70/30 or 95/5, but the principle is remarkably consistent, and it provides us in fastener marketing with a strategy management consultant that is objective, reliable, and that doesn't require payment or even so much as a cup of coffee.
The 80/20 principle is completely free and works 24/7. The trick is in finding ways to apply it so that we can maximize its effectiveness. As a matter of fact, you might says that 20 percent of the ways we use the 80/20 principle will produce 80 percent of the results.
So in fastener marketing we can find many uses for the 80/20 principle. Let's start with one of the obvious ones - customer profitability.
If you have a decent database you should be able to print a list of all of your customers (whether you are doing this for your territory as a salesperson, or your district as a district manager, or the whole company as the big cheese)and how much profit (notice I did not say sales) you have made from each. Try the period of 11/1/07 - 10/31/08. That's it. Keep it simple. 80/20 loves simple.
Now sort that list (paste it into excel if you need to) by total annual profit from each customer, with the greatest profit total at the top, and working down to the customer that contributed 64 cents of profit during those 12 months.
Now run a profit total for the whole list, let's say it is $100,000. Now you want to see how many of your customers give you 80% of that profit (in our example - $80,000).
You know what is going to happen, but you still have to do this. You have to see it. Go down the list until you accumulate $80,000 in profit. You will be surprised that you don't have to go very far down the list before you hit that magic number. Now, the portion of customers won't be exactly 20%, but it will probably be a striking figure.
Now, the first thing you should do is find some meaningful way to show your appreciation to those top few customers who are giving you such a huge portion of your profit. Don't call them and say, "Hey, I ran an 80/20 analysis and you are in the top group, so thanks!" but figure out how to make sure the customer feels appreciated, and to make sure you are not taking them for granted.
That is a very important step, but it is only the beginning of how you can use these 80/20 results. So stay tuned for Part 2.