The Pareto Principle
The Pareto Principle is the theory that 80% of effects come from 20% of causes. When it is applied to business theory, people say that 80% of your profit will come from 20% of your customers.
Consider Profit but a Pain
So if you are looking at how to grow your business profitably, conducting research on the customers who make you the most profit seems like a sensible starting point. Now there are some important caveats to throw in here for example are client might be highly profitable but be a complete pain in the butt to deal with ( paying late, asking for lots of changes / modifications, leaving orders late and expecting immediate delivery) so these elements need to be taken into consideration.
Lets consider how to practically do this research / analysis
Action to Complete the Pareto Analysis
- Write down a list of your “Top Ten” clients by profitability
- Now for some this will be easy, they will have the accountancy systems in place to run a report and get this list in seconds
- For others identifying the top 10 by profitability will be a more onerous task involving discussions with your accountant
- For many “true profitability” will be incredibly difficult to identify
- Many of the manufacturing companies I work with initially have no idea about the “real” profit they make when designing / manufacturing a new product. With design costs, research, additional production time just being lost within the system. This often means that a project that you thought would be highly profitable, simply ends up covering costs or losing money
- Top Tip: Make sure you have accurate information available – its pointless working to get more customers who have the profile of a loss making customer
- What characteristics do these Top 10 customers have in common
- The amount they spend
- Number of orders placed
- Type of person you deal with
- Type of products / services they are buying
- Talk to them
- Don’t Email them
- Don’t send them a survey (printed or online)
- Talk to them, ideally face to face, with specific time allocated to an open and frank discussion
- Find out about how they heard about your business / product / service
- Now I know sometimes this can be difficult (especially) when they have been a customer for a long time, but its useful information to gain
- For more recent customers, did they find you on the web, was it via a referral etc.
- Identify how they use your product or service ( especially important if your product is sold through central procurement, so you sell the product but have no idea about the end application)
- Ultimately we want to be able to be able to develop a profile for these customers
Now answer these questions:
- What do they have in common?
- Where did you meet them?
- How did they find you?
- Where can you find more customers like them?
- Do you put in significant effort to acquire more customers like them?
- Do you have similar clients in the pipeline
- In fact do you have a sales pipeline
- If you do have a pipeline, how do you manage it, do you have the CRM systems and processes in place
- What actions can you take over the next 30 days to acquire a new customer like them
- Note: recognising that some prospects can take months / years to nurture and develop before they can purchase, unless you start the process you will never complete the sale
In Summary : Looking For Growth – Pareto Your Customers
- Identify your top 10 most profitable customers
- Analyse them
- Talk to them to accurately understand why they choose you
- Research how to find more customers that fit this profile
- Take Action – to start finding the “right” kind of customers
- Don’t get distracted – other orders may be eating into your time and losing you money
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