Have you heard of the Pareto Principle? Or maybe you know it by its other name… The 80/20 Rule?
This is a pattern that was first identified by an Italian economist Vilifredo Pareto in 1896. He first noticed that 80 percent of the land in Italy was owned by 20 percent of the population. Then, when he realized that 20% of the pea pods in his garden produced 80% of the peas, the pattern started to appear everywhere, both in nature and beyond — at every level of existence! For example, astronomers have noticed that the sizes of craters on the moon conform to Pareto!
But what does this have to do with your business? Well, Pareto’s principle appears wherever you look in business too.
For example, it is very likely that:
- Your top 20% of salespeople generate 80% of sales.
- 80% of your turnover comes from 20% of your customers.
- And 80% of your support costs also come from 20% of customers.
But when we look closer at profits, a more dramatic pattern emerges! The pattern is that very often your top 20% most profitable customers will actually account for around 110% of your profits!
How is that possible? Well, most businesses (of a certain size) actually lose money selling to the bottom 20% of customers! So the simplest and easiest way you can boost your profits by 10% or more is this: Fire the customers that cost you money! Sounds counter-intuitive, I know, but sometimes you can increase your profits by getting rid of customers..
Consider the opportunity-cost. Even though these are paying customers, they also take up far more of your sales team’s time, may habitually beat you down on price, and then need significantly more support than the majority. If some of these costs are overheads they can be difficult to quantify.
But to fire these accounts can free up your valuable resources, which can be then put to better use serving more profitable customers, thus generating additional profits.
But let me qualify that piece of advice I just gave you: It is a simple way to boost your profits- provided that you know exactly how much you make from every sale to every customer, you know all associated costs, and can see at a glance whether you’re making a profit or a loss.
If you don’t have that information at your fingertips schedule a call today and see how you could take your business into a new level of profitability.