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.
- On a chart, list your 5 best customers (however you define that term)
- In the first column, enter the total revenue you generate annually from each customer and calculate the total of the column
- 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
- 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:
- They are unprofitable or marginally profitable
- They argue about prices
- They are slow to pay
- They are high-risk
- They complain a lot
- They are slow to respond to requests
- They don’t refer new customers
- They have unrealistic expectations
- They abuse team members
- 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