Apply the 80/20 rule

The 80/20 rule (also known as the Pareto Principle) says that 20% of your activities generate 80% of your results.

From this, we derive principles such as 20% of your customers generate 80% of your revenue, so an assessment of whether you keep serving all of the remaining 80% can be very useful, as you are probably losing money on many of them.

Here’s one example of an exercise to apply the Pareto Principle.

  1. On a chart, list your 5 best customers (however you define that term)
  2. In the first column, enter the total revenue you generate annually from each customer and calculate the total of the column
  3. In the second column, enter the total revenue you could generate if you sold each customer your complete range of goods and services. Now calculate the total
  4. Compare each column and ask yourself, “How should we change the allocation of our marketing and other resources?”

Here’s another exercise to help identify customers who should be sacked:

This approach requires you to be honest and at times can be difficult. However if it is applied correctly it can significantly improve your efficiency and profitability.

Twice a year, get your team together and ask each person to nominate one, two or three customers for expulsion.

These “bad” customers tend to have certain common characteristics:

  1. They are unprofitable or marginally profitable
  2. They argue about prices
  3. They are slow to pay
  4. They are high-risk
  5. They complain a lot
  6. They are slow to respond to requests
  7. They don’t refer new customers
  8. They have unrealistic expectations
  9. They abuse team members
  10. They are rude

Once you’ve decided which customers need to go, you can decide on the best approach:

  • Sack them in person
  • Sack them over the phone
  • Sack them by letter or email

This process will help you to free up your time to focus on bringing on board ‘good customers.’ Who will not be a drain on your resources and are less likely to cause you or your staff stress.

 By Andrew Rhodes

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