Why 80% of Your Business Is Dragging You Down
Most of us have bumped into the Pareto Principle at some point. Simply put, it states that in any given situation, 80% of effects come from 20% of the causes.
In business, we're most frequently aware of the Pareto Principle at work when dealing with our customers or clients. We're all familiar with the notion that a small number of our customers typically generate a high percentage of our sales and profitability. Take a look at your own customer or client list and you'll likely be surprised how closely the numbers hold true -- that the top 20% of your clients do in fact generate 80% of your revenues and/or profits.
As a result, it's often these VIP clients and customers who receive a disproportionate amount of our time and attention. They get dedicated service lines, faster turn-around, priority access, better discounts -- a whole wealth of features and benefits that wouldn't be cost-efficient to provide to the entire customer base.
But the Pareto Principle also holds the key to rapidly accelerating the growth of your business next year. It can show you how to free up resources and discard much of the dead weight that has been holding you back.
To unleash the hidden power of the Pareto Principle, you just need to recognize that the principle also applies in reverse. Yes, you can use it to analyze positive cause-and-effect dynamics (like top customer lists), but it's worth turning it on negative, time- and resource-consuming activities as well.
Here are just three examples. Apply them and you'll free up a lot of resources to fuel next year's growth.
1. The bottom 20% of your customer or client list. The simplest extension of the Pareto Principle is to reverse its application to your client list: Just as the top 20% deliver 80% of your revenues or profits, so too, the bottom 20% will generate 80% of your service calls and remedial work. In other words, the bottom 20% will cause you 80% of the grief.
Take a hard look at that troublesome (and trouble-creating) bottom 20%. What would happen to your business' ability to service the rest of your customers -- and your ability to grow the company -- if you diplomatically shed them? Industry leaders regularly cull their client and customer lists to focus only on those who fit their ideal customer profile. You should consider doing so, too.
2. The 80% long tail of your purchases and supplies. Print out a list of all suppliers and vendors you paid this year. Guess what applies to 80% of that lengthy list? Yep, our friend Pareto, who tells us that that 'long tail' of suppliers and vendors is supplying you with only 20% of your needed goods and services. That 20% is therefore eating up a ton of administrative time and energy processing a massive amount of invoices, statements and payments -- all for a relatively small percentage of your total purchasing needs.
Take a look at how you can cull this list, too. Can you consolidate purchases from other suppliers, or plan ahead so you don't need to scrabble around looking for a supplier at the last minute, or find a wholesaler that stocks a half-dozen or dozen of the products you're currently getting from many different sources?
3. Product list review. We all tend to bring a degree of emotion to any review of our product or service offering. After all, these products and services are what got us here -- they're what the business is founded on. As we develop new products and services, we seldom give any real thought to discontinuing those that are yielding little return. Over time, this leaves us with a sprawling list of products and services.
Make a start by applying Pareto. First off, identify the top 20% of products, which deliver 80% of your revenue (or profits). So far, so good.
Now for the difficult bit - what about the 'reverse Pareto'? What about the bottom 80% of products and services that are only supplying 20% of your sales or profits? It may be that there are good reasons why one or two of those products or services should survive a 'Pareto Review' (cross-selling, up-selling, retains legacy customers, for example), but you should at least force yourself to go through the process.
These are just three examples of where a Pareto review can help you free up energy and resources to focus on growing your business next year. I'm sure you can think of some others. Care to share your ideas with us in the comments below?