The 80/20 Rule In Small Business

80-20 Rule In Small Business - Dustin's Blog

What is the 80/20 Rule?

The 80/20 rule, a.k.a. the Pareto Principle, is taught in nearly every sales management training course in the world. It’s easy to remember. Here’s the gist:

80% of your profits are generated by 20% of your clients.
20% of your profits are generated by 80% of your clients.

Take a minute to think about your most profitable clients. What does your relationship look like? I’m sure it looks something like this:

  • They’re low-maintenance.
  • You enjoy speaking to them.
  • They buy without asking about price.
  • You’re happy to help them.
  • They’re happy to send you referrals.
  • You trust each other.

Now, take a minute to think about your least profitable clients. I bet is looks something like this:

  • They’re high-maintenance.
  • You spend a great deal of time dealing with their complaints.
  • They price shop you against the competition regularly.
  • You’re constantly dropping your prices to keep them happy.
  • They send you zero referrals.
  • You’d rather have dinner with your in-laws than speak to them.

Notice that I say, “most profitable” instead of, “top spending” clients? I refer to profit because large corporate accounts often use a bidding process. They, or their purchasing departments, submit the RFP (Request for Proposal) to three or more companies. For the most part, they choose the least-expensive. I’ll discuss ways to win these deals in a future post. For now, let’s focus on improving the 80/20 ratio.

Saying “No”

How do we change the ratio of the 80/20 rule? In short, start saying “no.” In the beginning, saying “no” is pretty uncomfortable to most small business owners and entrepreneurs. That’s understandable, particularly when it could cause the company to take a temporary revenue hit. For this to work, it’s important to realize the revue hit is temporary and profit is much more important than revenue.

“No” Scenarios:

Example 1

20% Profit Client: “Company-X is offering the same thing for 15% less. I need you match that if you want to keep my business”

You: “I understand that you’d like to save money on this purchase because it’s important to get the most out of your budget, however, our company provides the best pre- and post-sale service and support in the business. As a result, we’re confident that our clients receive the most long-term value.”

20% Profit Client: “That’s great, but I want the cheapest price now. If you don’t match Company-X, I’m going with them.”

You: “I’m sorry to hear that. I hope it works out well for you. Don’t hesitate to call us in the future if you change your mind. Best of luck!”

Example 2:

20% Profit Client: “I spent a ton of money on this thing and I can never get it to work the way I want it to. You need to send somebody out here to make it work right!”

You: “I understand that you feel frustrated because you bought an expensive item and could not install it yourself, however we did offer you professional installation at the time of the sale and you declined. If you’d like to purchase a professional installation right now, I’m happy to assist you with it.”

20% Profit Client: “I’ve spent enough already. If you don’t send them out for free, I’m never buying from you again!”

You: “We hate to lose your business; however, we are unable to offer free installation because we pay for the top professionals in the industry to perform widget installations. You are welcome to return the widget and we will refund your money minus a restocking fee if you opened the widget. I’m happy to assist with that as well.”

*This is a hypothetical customer that doesn’t value your services and insisted on installing the widget themselves. I would recommend against selling to these customers in the first place— Remember, this is only an example. The point of the exercise is to be okay with turning away customers who cost your business money.

What if I can’t afford it?

So, you’re thinking, “This sounds great, but I can’t afford to lose clients right now!” Yes, you can. In addition to profit, the 80/20 rule applies to time. Companies spend 80% of their time dealing with the bottom 20% of revenue generators. In the scenarios above, you free up a portion of your day to call your top 20%, then ask them for referrals. They will appreciate the follow-up and you will appreciate the new business.

“1 in, 2 out”

An effective way to bring the 80/20 ratio down is to implement a 1 in, 2 out rule. This simple rule says, “Replace two 20% profit clients with one 80% profit client. Next, repeat the process. As a result, your ratio improves to 70/20, then 60/40 and so on. The 1 in, 2 out rule reduces stress and declutters your inbox. Additionally, the 1 in, 2 out rule can be used everywhere in your life. Is your desk messy? Every time you get something new for your desk, put 2 things away. Have too many t-shirts? Every time you get a new one, throw two out. Ultimately, you’ll thank yourself!

Great Marketing Generates Great Leads

If the 80/20 rule is causing you pain and you’re maxed out on referral favors, it’s probably time to change your marketing strategy. If your leads suck, you’re not marketing to the right audience. Online marketing gives small businesses the power to target very specific markets. On the other hand, it’s pretty easy to spend quite a bit of online marketing money, while never reaching the audience your business needs. If you’re stuck, contact a pro!

I originally wrote this post for Consonant Marketing.

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *

Post comment