The 80/20 principle is used a lot in business. Whether it’s Tim Ferris in the “4 –Hour Work Week” or Richard Koch’s “The Secret to Achieving More with Less” the theory is the same: the most results in any situation are determined by a small number of causes.
The 80/20 principle originated in the 19th century by economist Vilfredo Pareto who observed that 80 per cent of land in Italy was owned by 20 per cent of the population. He then carried out surveys on various countries and found to his surprise that a similar distribution applied universally.
Applying the 80/20 Rule to Business
The 80/20 rule is a simple way of looking at your sales and profit figures to identify the largest sources of contribution.
No matter what the size of your business, it can be tempting to be all things to all people. Make the most number of potential customers happy in the hope they will all convert, instead of concentrating on the most lucrative ones.
By adopting the principle you are going to feel like you’re ignoring something, but that’s because you are. It might be irritating at first, but once you start to really analyze your business, you will see not all customers are created equal.
By knowing which customers are the most profitable will help you and your business most:
- Make sure you are looking after those customers
- Understand what makes them profitable
- Use this information to find other similar customers
How to Find the Magical 20 Per Cent and What to Do When You Find Them
The good news is that you already have the data to find that magical 20 per cent of your customers who will have the highest conversion rate. You just have to understand it.
Mine Your Customer Lists
Whether it’s your email distribution list, Facebook followers, website analytics or point of sale look at the data of the customers who bought the most recently, bought the most frequently and who spent the most money. They are your chosen 20 per cent.
Make sure you concentrate on your most recent data. Historical data may not provide an accurate or realistic indication of future sales and profit potential. You will need to take a view on how representative the data you have is, and go from there.
Find Out Where They Are
Now you’ve found the chosen few, find out where they are located. This will help you better target your advertising efforts. If for example you know that the majority of those customers are located in the Abbotsford vs. Okanagan Falls you will be able to narrow your social media and internet advertising to a very specific area and create a bigger bang for your buck.
Identify Their Unique Attributes
The joy of social media means that you now have access to a lot more information about your customers than ever before. Stay open-minded and start delving into their data. They could be foreign students from a specific country, stay at home moms, members of specific sports teams, etc. If you are a kitchen appliance retailer and stay at home moms are your core group, take advantage of this insight and create endorsements of people that have used the appliances and how it has helped them keep their family healthy, or has saved them time. Whatever their key attributes are, find them and use them in your marketing efforts.
Find Your Silent High Volume Buyers
Every business has them. They may only purchase something a few times a year, but each time it’s a big order. They probably require so little maintenance that you haven’t even realized they’re there. Find out who they are and do something unexpected. Whether it’s take them out to lunch or changing their account to VIP status, by initiating that contact you will be able to find out more about them, and if there is another product or service you could be helping them with.
While of course you will get many sales outside of the core 20 per cent that you have identified the purpose of the 80/20 rule is to help you identify where the most amount of your effort is made. Helping you make decisions about allocating your limited time and resources, achieving your best available returns and deciding how your business should grow.
For help with market research techniques for your business, book an appointment with Mark Eversfield, our Market Research Analyst today.