Who Brings Home the Bacon? – The 80/20 Rule
No, I am not talking about your family responsibilities—I am talking about your customers. Do you know who brings in the profits for your company?
Would you be surprised if I told you that a mere 20% of your customers are producing the vast majority of the profits in your company?
The 80/20 Rule
Wikipedia states the definition of the 80/20 rule as thus:
“for many events, roughly 80% of the effects come from 20% of the causes.”
The 80/20 rule was popularized through the influence of Vilfredo Pareto, the Italian economist who discovered that 80% of the land in Italy was owned by 20% of the population. As it turns out, this principle applies to much more than land ownership in the country that looks like a boot.
Pareto’s Principle Applied
| 1. 20% of the world’s population makes 80% of the world’s income.
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| 2. By fixing 20% of the bugs in software, Microsoft discovered that they eliminated 80% of their errors and crashes.
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| 3. 20% of workers produce 80% of the results.
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| 4. And very important to this discussion: 20% of customers produce 80% of the profits.
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Is this really true?
I just tested this for CLIP Lawn Care for the 2008 season and the principle holds true.
While not exactly 80/20, I found that the top 20% of my customers produced more than 70% of the profit.
This is HUGE in terms of how you run your business. Consider the following questions:
| 1. Do you know who those customers are?
Application Action: If you don’t know this, please subscribe to receive part two of this post later this week. I will be demonstrating how to determine this using CLIP and Microsoft Excel.
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| 2. Are there any services that these customers are not receiving that would be of value to them?
Application Action: Take 5 minutes to look at the list of customers and determine what services you could offer these customers. Then take another 5 minutes to brainstorm how you could introduce this service to them? |
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| 3. Do you know if these customers are completely satisfied?
Application Action: Give these 20% a call soon to see if there is anything you can do for them to make them a happier customer.
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Stay tuned for Part II…
Photo by cyclone bill
