Monday, December 22, 2008

Fastener Marketing with the 80/20 Principle - Part 2

In part 1 we reviewed the basic first steps of making an 80/20 analysis, using customer profit data. Now, at long last, we'll go over how you can turn the data into information and action.

Use the results of an 80/20 analysis to help you see patterns you might not have noticed (or didn't want to notice) otherwise.

The most obvious would be that a small group of customers produces a huge portion of the profit. This is super important. I know I am repeating myself from part 1, but hey - it is important.

If you lose a small portion of this top customer business, you lose a big chunk of profit. Not just sales - profit.

On the other hand, if you treat them well, find out what you are doing right (best way to find out? - ask them!), and apply the time and resources to do more of it, any increase in activity with these top customers adds a big chunk of profit. It's the leverage of 80/20 and it works both ways.

Next scan your prospect list and the bottom 80% of customers for the ones that could be in the top 20% and think about how to get them there.

T.S. had an excellent comment about negative ways 80/20 information is all too often used. I agree with him.

Don't go telling your customers that you have run any kind of analysis. They really shouldn't know how they compare with your other customers.

Your customers only need to know that you appreciate them by how well you take care of their needs and wants. The analysis is to remind you to do just that.

Don't use the numbers to apply silly labels and give cheesy plaques to the top customers while effectively letting the rest know that they are second-rate.

But do use this great information internally in order to allocate precious resources like time. There are plenty of ways to make sure you are using these resources where they will have the most impact (leveraging the top 20%), without kissing off the bottom 80% of your customers.

So that will lead to part 3.

Monday, December 8, 2008

Fastener Marketing with the 80/20 Principle - Part 1

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.