More Uses of the 80-20 Rule

Improve your cash flow and profitability

I’ve been looking at the 80-20 Rule, the concept of the “useful few, and how you might apply this most useful tool to improve your cash flow and profitability.

In the last blog I looked at how it can give you some really useful information when applied not just to product sales, but also to the profitability of those sales. 

And when you match that with the customers those product sales and profits come from, you have some information which enables you to target your marketing to maximise returns.  Be specific with your messaging to those markets.

Specific, targeted messages to those most likely to buy will be much more effective than a generalised message hoping to entice “everyone”.  Remember, the whole point of this Rule is that you will get most of your sales and profits from a small proportion of your products, and customers.

To quote Richard Koch, author of the “The 80/20 Principle”; “One of the most useful things any businessperson can know and use is that, almost certainly, a fifth of your customers are responsible for four-fifths of your profits – or something similar.  Sometimes 20% of core customers account for fully 100% of profits, and the rest on average are – if you analyse their true value – loss makers.  You would be better off without them.” 

Certainly I have found that last point true with clients; true profit leaks – customers, and products, which don’t make you any profits.

So here’s an insight for you; sales and marketing therefore begins with product development for your very best and most enthusiastic customers.  They will buy more from you, and be willing to pay more for better value products.  You will see that insight being applied to my website in the near future.  I’m working on it.

And it is certainly easier to grow by selling more to your existing happy customers than it is to find new customers who will love what you do.

So let’s move on to look at where else you can apply this useful rule

In business, action is indispensable.  Without action, and momentum, you are going nowhere.  But you will go further, and more quickly, if you work on the right tasks.  Do you find yourself working on urgent tasks rather than important tasks? 

Our friend, the “useful few” comes in here.  Just as 80% of the problems you face arise from 20% of the causes, Pareto’s 80/20 rule suggests 20% of the average workday is spent on “crucial” and “important” things while a scary 80% is wasted on things that add “little value” or “no value”.  Take few minutes each day to separate the two.

If you want to try a really scary exercise, work out how much time you spend each day adding value to your business.  Paul Lemberg  has conducted extensive formal and informal surveys on this question and reckons that an average it is about two and half hours, about 25% of your day. 

And then there is waste!  Is there waste in your business – tasks that have to repeated, on-going errors that are not fixed, premium freight costs, scrap, re-work, customer returns, complaint servicing etc. 

Inevitably some causes of waste will cost you more than others.  80/20 will apply.  Find the 20% causing 80% of the waste and you will be well in front, and have recovered some useful time.

What about products for which there is no real market?  You will waste a lot of time trying to sell them, and any advertising you do will be unproductive.  Unproductive advertising is an expense, not an investment, a waste of money.

Customer complaints are another mine of opportunity.  Review the data from your Complaints Register.  Are there some Pareto Issues (80/20) which can lead to recovering or preventing unhappy customers?
•    Which are complaints occur most often?  Does a particular brand, a model or part stand out? 
•    Which complaints are taking longest to resolve?  From customer’s perspective, it should not take a month to do a warranty repair on a refrigerator.

Improve your business processes – are your processes, whether they are servicing customers, or supporting those people servicing customers, efficient and effective.  Are there some performance gaps that you would like to close?

Collect some data to identify & confirm which factors & processes are the most important.  What can you measure, e.g. time, cost.  This is where you avoid the instant solution.  Instant solutions usually happen when people don’t understand what is going on.  You need some information and to analyse that information. 

I’ve done a lot of this for clients over the years.  The same picture always emerges – there will always be a few factors that are having the greatest impact.

Remember you don’t have to fix everything to close a performance gap.  You just have to fix the few things that are causing most of the problem.

Use the 80-20 Rule to improve not just the profitability of your sales, but to improve the business behind them.

To your profitability and enhanced cash flow.

© Copyright 2014 Adam Gordon, The Profits Leak Detective

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