In a company, managers usually have an impression that some customers, sales reps, or products are “good”. Management theory reinforces that impression with the well-established “80/20” Rule, which is well explained in the book by Richard Koch .
Probably 80% of your sales come from 20% of the customers, 20% of the sales reps, and 20% of the products. The Rule is remarkably consistent. So the obvious decision is to concentrate on the 20% and throw away the rest. This may well be the best tactic.
However, while many managers understand the Rule, there is often a reluctance to act upon it. We say to ourselves “we need a full line of products”, or “we need national coverage”, or we need “fully featured software”. So we continue to spend effort on our less attractive customers and products.
Few of us have the courage to go “cold turkey” and eliminate the poorly performing customers, products, and sales reps. Also, we want to avoid being confrontational and generating bad will. So what can we do?
Image from: catapultadvisorygroup
With products, the best approach is to raise the price on the low performers. Some customers will stop buying, but overall that will not hurt sales very much. Some customers will pay more, so we are better compensated for our efforts. Airlines are masters of this tactic. It is cheaper to fly from London to Los Angeles, than Edinburgh to Montreal, even though the distance is longer. Airlines increase the price for less popular routes.
With sales reps, change the compensation scheme. A good example is Century 21 Real Estate in the USA . Century 21 makes its sales reps pay for office space, secretarial help, etc. But Century 21 pays the highest percentage commissions in the industry. So for a top sales rep, Century 21 is the best place. For low performing sales reps, they would be happier elsewhere. With this simple compensation plan, Century 21 grabs all the high performers – the 20% who bring in the 80% of the money.
With customers, you can also change the terms. A good tactic is a minimum order size. For the popular products this is no problem as customers want lots of these attractive items. You can be a little clever here, perhaps having a minimum only on the poorer performing products, or increasing the Shipping and Handling Charge, but free shipping on orders over a certain size.
Be careful how you measure the 20% – it is not just total sales. We want Profits not just Sales. Maybe a popular product causes a lot of returns and warrantee problems. Perhaps the sales rep in London sells more than her counterpart in Liverpool, but the London office and other expenses are much higher. Big customers are often pressing for discounts or slow payment terms, and maybe are not as truly profitable.
The Rule extends to technology. Microsoft found that 80% of the Windows crashes came from 20% of the reported bugs. Even within the 20% there was another hierarchy, where 50% of crashes come from only 1% of the code .
In website usability, the Rule still applies. At Enterprise Rent-a-car, of 33 awkward website problems, only 2 problems affected the majority of customers. Most of the problems affected only 1 or 2 customers . We see the vital few and trivial many.
With software products, from the same usability study, it was found that 80% of the customers use only 20% of the features. Customers reported that the extra features were confusing and actually detracted from the tasks they wanted to perform. This writer used Corel Paintshop Pro for many years to grab screen shots. Then Corel added so many advanced graphics features that the basic screenshot capture became too complex for everyday use.
It is unusual and amazing that a principle like the Pareto “80/20 Rule” should be so consistent and widespread in its application. It makes sense to start applying the Rule.
Here is how you can start:
- Decide what item, topic, problem, or feature list you want to improve. This could be Sales by Sales Rep, Profits by Branch, Complaints by Topic, Features by Frequency of Use, etc.
- Identify the Root Cause – maybe 2 problems are caused by the same error.
- Score the items, such as Gross Profit by Customer, Number of Complaints by Topic, Sales by Branch Office, etc.
- Rank order the items by their scores.
- Identify the few high scoring items, and take action on those items first. Fix the errors, change pricing, change saleperson compensation plans, change order terms, or resequence software menu items. Take action to promote the benefits of these high scoring items.
- Flag the low scoring items. These customers, products or features should be removed or deemphasized. Promoting the high scorers often also has the effect of deemphasizing the low scorers. Consider that the problems with the low scorers may be so rare that they are not worth fixing. The cost to correct the item may be more that the benefit received.
Most of us in management have far more topics to manage that we could ever hope to resolve in a normal work week. So take a moment to think back to Signor Pareto. Make a list of the topics in each area and rank them by frequency or impact. Tackle the top 2 items on the list and leave the rest till next week or never.
Think carefully about the details – you want Profits not just Sales, for example. Then act decisively. That action will save you a lot of time and expense on areas that bring in little profit or benefit.The inexpensive Richard Koch book is an excellent further explanation, including practical hints.
Koch, R. (1998, January). The 80/20 Principle. The Secret to Success by Achieving more for Less. Crown Business. ISBN 978-0385491747. There is also and updated 2014 edition. Online at: http://www.scribd.com/doc/3664882/The-8020-Principle-The-Secret-to-Success-by-Achieving-More-with-Less
Century 21. (2014). Agent Earning Plans. Retrieved from: http://www.joinc21justright.com/90-plan-new.php
Rooney, P. (2002, October 3). Microsoft’s CEO: 80-20 Rule Applies To Bugs, Not Just Features. Retrieved from: http://www.crn.com/news/security/18821726/microsofts-ceo-80-20-rule-applies-to-bugs-not-just-features.htm
Sauro, D. (2012, September 12). Applying The Pareto Principle To The User Experience. Measuring Usability. Retrieved from: http://www.measuringusability.com/blog/pareto-ux.php