How does the 80:20 rule impact on your business?

PIETaking a segmented approach to managing your customers could help you grow your business.

We have all heard about the 80:20 rule and have seen so many references to it in business terms that we almost gloss over it at times.  But what does this mean and how can we use it to positively impact our business?

The 80:20 rule could be applied to many different business scenario but in general it suggests that sometimes 80% of the gain or benefit can be achieved with as little as 20% of the effort.  Obviously this is a generalisation and it might not always work out exactly that way but nonetheless this forces us to think about certain aspects of our business a little differently.  The example I am going to use in this blog post is customer relationship management and how we could use the fundamental principles of 80:20 to re-focus our efforts and potentially achieve a greater return from the business we do with our existing customers.  

Wouldn’t it be great to think that by simply focusing on 20% of our customers that we could generate 80% of our business??    A great scenario of course but in most cases it may not be quite as simple as that so instead I am going to focus on a simple segmentation approach which can help us at least identify where we are currently putting most of our customer management effort and whether this is giving us the best return for these efforts.

In the picture below we can see a simple diagram which can be very useful in terms of segmenting your customers. Basically they are categorised based on the Margin or Profit potential which they are generating for your business but also in terms of the Sustainability or longevity of this business.

Diagram

Lets first examine the Margin aspect and here we could position our customers along the vertical axis based on the size of the margin in €€€€ terms which this business relationship generates for you.

On the horizontal axis we are focusing on the level of sustainability i.e. is this the type of business relationship we think will last and will continue to generate good profit margins for us. Within this question we also need to consider the customer’s actual business itself i.e. are they doing well in their particular sector?  are they growing?  Are they considered to be a well-run business with a good reputation in the market etc etc.

Now if we take a quick look  at each of the four areas in the diagram we can visualise the following messages :-

RETAIN = those customers who may not necessarily generate the highest  revenue & margins but they are solid customers who are likely to be around for a long time and which will offer an element of business security and certainty. At the start of each financial year you should be in a position to predict what revenue can be derived from this segment and your management of this customer should be based on maximizing the business you have with them and understanding how to improve efficiency and margin.

INVEST = those customers who may be riding the wave in terms of growth and which can offer you both sustainability but also very good margins. These are the customers you want to attach your business to, build the best possible relationships and investing in nurturing these relationships and offering value added solutions is a good strategy to employ.

DEVELOP = those customers who may have the potential to be in the top right box in terms of sustainability and margin but who need time to develop their own business in order to get there. The margins might be lower than desired today but the potential is there and the most important thing with this type of customer is to develop a partnership type relationship where you grow with them. May also require a level of investment in time and/or resources but this is a gamble based on seeing the potential which exists.

EXAMINE = those customers which are perhaps not currently justifying the amount of time and effort you put into them and when you compare the returns with clients in the RETAIN and INVEST categories they fall well short. It could be a customer which is having their own business difficulties or simply a difficult customer where you are having to do a lot more than you would typically need to do for the volume of business achieved.

In summary, regardless of what labels you put on the 4 quadrants or how you go about assessing the respective customer types it is a very valuable exercise to segment your customer base and get a clear understanding of how to maximize the return on your efforts across the full range of customers.  The 80:20 rule makes it sound very simple and of course it is never as simple as that but as a rule of thumb with the quadrant model  you should be aiming to move as many customers as possible into that top right quadrant.  For those customers who, despite your ongoing efforts, continue to languish in the bottom left quadrant  –  well you should be considering strongly if the benefit of doing business with these customers is worth the effort and whether that effort could be re-distributed elsewhere for greater gain.

John Flynn – Management Consultancy

John Flynn - Beacon Initiative

John is part of the Beacon Initiative Virtual Management Team, which can assist qualifying SME’s to grow through the provision of management expertise that may not be accessible to them currently.

For further information on the Beacon Initiative, contact Padraig O Sullivan, Programme Manager on 021 4285140 / Mob: 087-773 0019 or email Padraig.osullivan@corkcoco.ie.