One of the most firmly entrenched and accepted theoretical principles of the 20th century is Pareto’s principle, more commonly referred to as the 80-20 rule. Its basic premise states that 80% of the effects result from 20% of the causes.
As a home-based or other small business opportunity or franchise owner, if you ever feel like a jack of all trades-master of none, then knowing more about the 80-20 rule may be of some benefit. Furthermore, understanding how to use the principle wisely and apply it to your management of customer relationships with the purpose of ultimately increasing sales in particular can be very helpful.
Although it originated as an economic philosophy, the Pareto principle has been used as a core construct by pundits at one time or another to guide us in virtually every facet of life. Its implications stretch from how much time we should spend doing what we truly enjoy to the number of people we count among our closest friends to ensuring we focus most on what it is we do best.
When it is applied to the business world specifically, the 80-20 rule also has much to offer in the way of guidance. However, there are times when its limitations actually may work to a business owner’s disadvantage. Knowing how to recognize those instances and act on them is not only necessary but appropriate.
Here we take a quick look at the 80-20 rule as it specifically relates to how business owners manage customer relationships with the goal of positively impacting sales and where exceptions to the rule in this regard might apply:
The 80-20 rule as it relates to sales states that, “20% of your customer base produces 80% of your revenue,” the implication being that you would do well to focus the majority of your time and energy on the top 20% and less so on the remaining 80% if you want to be profitable. The principle is a good one that works very well for many business owners in most circumstances.
However, as many experts are quick to point out, the customer-client relationship is not solely a quantitative one and is ultimately about much more than money alone. In fact, some would argue that the dollars and cents are the easy part. Smart business owners intuitively know that there are a number of qualitative factors that also come into play.
For instance, let’s say you have a client who isn’t among your top 20% when it comes to revenue, but who ranks somewhere around the 50% mark. Let’s also say that person knows everyone in town and is willing and able to be a very valuable resource for you when it comes to networking marketing business opportunities and referrals. Now, is that a customer that you can afford NOT to rank in the top tier when it comes to your time and energy? Of course not! You’d be a fool to let someone like that languish on the back burner.
This client is your exception to the rule.
How about a client that you really enjoy working with who doesn’t take up a lot of your time unnecessarily, is usually content with the finished product you provide the first time and who is what you’d deem to be all-around “low maintenance?” Isn’t that a customer that is worthy of your full attention in the relatively few instances that it’s needed? Once again, you may just have yourself an exception.
The point is that while the 80-20 rule serves as a good overall guide for how to rank your customers when it comes to quantitative factors alone, it’s also just fine―in fact, it’s imperative―to give careful thought to who among them is the exception. After all, being able to make decisions of this kind in a conscious and measured way—one that ensures a maximum return on investment of your precious time and energy—is what sets the truly successful entrepreneur apart.