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.
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I own the 80/20 CD that you show there. It is a very accurate and interesting concept. I have one problem with it however. I have worked with quite a few sales managers that have decided they want to shove the 80/20 down the throats of of the lower 80 and let them know they are just "silver" and not "gold" or "platinum" or whatever jargon you choose. I have always felt that the 80/20 was something that was hugely important but it does not need to be broadcast to everyone. If you apply it well, the 20% will feel they are appreciated and important. One does not need to negatively respond to the lower 80% while taking care of the big fish.
ReplyDelete@traveling salesman you are so right on. What we do with the 80% that provide 20% of the profit is the real trick, and the topic of part 2. Nobody in their right mind wants to blow off 20% of their profit.
ReplyDeleteI used to compete against a company that as part of their "marketing strategy" focused on the 20% and let the other 80% fall by the wayside. I picked up a lot of accounts that way, as the reps were virtually not allowed to call on the 80% They also did an analysis on the types of companies they had the most success with (like construction companies) and went after that segment. What they didn't realize, however, was that a lot of those type of very large, multinational companies don't own a lot of rolling stock, other than job trailers and pick-up trucks, but sub-contract most of it out.
ReplyDeleteIn doing analysis work for our 2009 Marketing Program, I took mostly at SIC codes; which ones showed growth, and which ones did not. My conclusion was to put effort into finding out what companies we did not deal with in those segments, making sure that our products fit in with their marketing mix (something the MBA's at corporate America didn't do) and solicit new business.
That, and a kiosk at the mall...