Would you be interested in knowing a way to increase your business by 16 times!
Got your attention? The following applications of the 80/20 Rule gives an insight into how this is possible.
If you have not yet read the first article in this Skills Module, SM2.1 The Amazing 80/20 Rule Tool read it prior to going further here.
Use the Force
The 80/20 Rule is not just a one-time wonder. It is what is known as a fractal meaning that it keeps repeating itself as you drill down.
So, if you take a town of 50,000 people, 20% (10,000 people) of them will have 80% of the wealth in the town. But, 20% of those 10,000 wealthy people will have 80% of all the wealth of the 10,000. So 2,000 people have 80% of the 80% of the wealth.
This is borne out by economic research as demonstrated by this quote from the Guardian newspaper.
Wealth inequality in the US is at near record levels according to a new study by academics. Over the past three decades, the share of household wealth owned by the top 0.1% has increased from 7% to 22%. For the bottom 90% of families, a combination of rising debt, the collapse of the value of their assets during the financial crisis, and stagnant real wages have led to the erosion of wealth.
The share of wealth owned by the top 0.1% is almost the same as the bottom 90%
What does this mean for you?
It means if you keep narrowing your focus and drilling down through several layers of the 20% market share, you will be tapping into increasingly fertile markets. So, don’t stop with just one 80/20 pass through your market.
If you plotted this on a graph it would look like the graph in the Perry Marshall link below.
Once you know that ten people will buy 1 unit of your product, you can also see that 1 person will buy a whopping 6.25 more times, 3 will buy 5 times more and 30 or more will buy half (a total of 15 units) as much if you had a cheaper, no frills version. If you are not alert, and have just the one price point on your product, you will cater for the 10 people but miss the ones willing to pay a lot more and the 15 units you can see to those only willing to pay a lower price. Car manufacturers have known this for years and offer a range of cars from cheap to luxury – with declining sales, but increasing profits, as the cars get more expensive.
For more, go to: Perry Marshall’s Power Curve
16X Results by Customer Focus
You already know that out of every 100 customers you have, a predicted 20% (20) will buy 80% of your services. Let’s say these big ones are buying $1,000 of product a month so their total purchases are $20,000 a month.
As this is 80% of your sales, we know the total sales per month is $25,000 and that the 80 smaller buyers share the remaining $5,000 between them and average $5,000/80 or $62 in sales each. The big buyer is buying ($1,000/$62=16) 16 times (16X) more than the small buyer.
Let’s assume that the same amount of sales resources is required to make a sale to either a big buyer or a small buyer.
Twenty units of sales resources applied to the big buyer yields 80% of the sales reward or (80/20=4) 4 sales units for each sales resource unit.
Eighty units of sales resources to the small people yields 20% of the sales or (20/80=0.25) 0.25 sales units for every sales resource unit consumed.
The return from the big buyers is (4/0.25=16) 16 times more for the sales resources consumed.
Which people should you focus your sales resources on do you think? Clearly the big people yield 16 times the result that the small people do so they are the best for focus on – or at least make sure they are serviced as well as possible before you turn to servicing the smaller buyers.
You may argue that the 80/20 does not apply exactly. Your results are more like 75/25 for example. But, applying the same logic as above, the big people are still 9 times better than the small people. If you are very skewed the other way and have a 90/10 ratio, the big ones are worth 81 times what a small one is worth to you.
If the units of sales resources required for the big buyers is more than for the small buyers, the 16X will be different. Let’s assume it takes double the sales resources to sell to a big buyer. That means 40 units of sales energy to each of the 20 big buyers or 2 sales units per sales resource unit. The small buyers have not changed so the math is (2/0.25=8) and the multiplier falls to 8X rather than 16X; but nevertheless a big difference.
If the price you can charge the big person is less than the small person due to, for example, quantity discounts, the 16X will also change but the discount would have to be very high (and it can never be too large or you are selling below cost) to bring the big buyer down to the small buyer in terms of their importance to you.
If you are not allocating your sales resources to service the big customers, and to find new big ones, you are forgoing a lot in possible sales.
If 20% of your sales resources are bringing in 80% of the sales from the big customers, you may be able to afford to ‘fire’ the small customers, reduce the size of your sales force and not be too much worse off. Or better possibly, ‘fire’ the small customer requiring the same service level as the big customer and divert the sales resources to finding more big customers.
Something like this might encourage you to move from having a labour consuming shop front to a warehouse operation which still services your big customers but discourages the less attractive smaller customer.
16X Results by Product Focus
If you agree with the discussion above, we can see that the same logic applies to your product mix.
Twenty percent of your product will be 80% of your sales; measured either in volume or in return – it works both ways.
Therefore these 20 big selling items return 16X what the 80 small sellers do.
The effort in ordering small selling items is likely to be similar to that for large selling items but for much less return.
You might consider continuously dropping small selling items off your list to focus on big selling ones. You might keep trying to introduce new products that your big buyers might want and see if they work out as big selling product lines (keepers) or small sellers (to be discarded).