The 80/20 Principle: The Secret of Achieving More With Less (17 page)

A company making automobile appearance products—waxes, polishes, and other car-cleaning accessories—marketed its products through car washes. In theory this was logical, since carwash owners would make incremental profits through each sale of appearance products simply by putting them on display in space that would otherwise serve no useful function. The idea was that they would give the products premium floor space and make an effort to sell them.

But when the auto appearance product business was sold and new management conducted a comprehensive sales analysis, they found that “the classic 80/20 rule applied—meaning 80 percent of the company’s revenues were generated at 20 percent of its retail sites.”
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When the new CEO turned up at 50 car washes generating minimal sales, he found his display hidden away in corners or other poor locations, allowing them to be mistreated and often badly understocked.

The CEO harangued the owners of the car washes not selling many of his products. He told them to pull their socks up and manage their point-of-sale displays properly. This didn’t work. Instead, he should have concentrated on the best 20 percent of car washes. What were they doing right? Could they do more of it? What did they have in common? How could more such outlets be found? As the successful outlets were owned by large, professionally run chains, he should have cultivated these outlets rather than trying to improve the performance of the sole-proprietor sites.

Be customer centered for the few right customers

Important as focus on the few best products is, it is much less important than focusing on the few best customers. Many successful marketing professionals have learned this lesson. A few cases may be cited. In telecoms:

Direct your attention where the real threat of competition exists. In most instances, the 80/20 rule still applies—80% of the revenue comes from 20% of the customers. Know who the top revenue-producing customers are and make sure you meet their needs.
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In contract management:

Remember the old 80/20 rule. Keep in closest contact with the 20 percent of your clients who give you 80 percent of your business. Every Sunday evening, go through contract management files and jot a note, send a card, or make a note to call anyone you haven’t had contact with for too long.
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Since 1994 American Express has conducted many campaigns to strengthen its franchise with the merchants and their customers who generate the highest volume of Amex sales. Carlos Viera, director of sales for American Express in South Florida, explains:

It’s the old 80/20 rule: the bulk of your business comes from 20 percent of your market. This campaign is more of a PR campaign to get people to dine out more.
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Successful marketing is all about a focus on the relatively small number of customers who are the most active in consuming your product or service. A few customers buy a great deal while a great number buy very little. The latter can be ignored. It is the core customer group that matters: those that consume heavily and frequently. For example, Emmis Broadcasting, which owns WQHT and WRKS radio stations, has conducted successful marketing campaigns focused exclusively on its core audiences, to increase the time they spend listening:

Instead of spending 12 hours a week with their favorite radio station, they are now spending 25 hours a week with it…we focus on the 80/20 rule of consumption with all of our stations…we get every single one of the listeners in our target audience and milk every single quarter-hour we can out of them.
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Focusing on 20 percent of your customers is a great deal easier than focusing on 100 percent of them. Being customer centered on all of your customers is pretty nigh impossible. But cherishing the core 20 percent is both feasible and highly rewarding.

Four steps to lock in your core customers

You cannot target the key 20 percent until you know who they are. Firms with a finite customer base can work this out individual customer by individual customer. Firms selling to tens of thousands or millions of consumers need to know who their key customers are (these might be channels of distribution) and also the profile of the heavy and frequent consumer.

Second, you need to provide quite exceptional or even “outrageous” service to them. To create a super insurance agency of the future, advises consultant Dan Sullivan, “you’d build 20 relationships and cover them like a run with service. Not regular service, not good service. Outrageous service. You’d anticipate their needs when you could and you’d rush like a SWAT team when they asked you for anything else.”
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The real key is to provide surprising service, above and beyond the call of duty and quite out of line with prevailing industry standards. This may have a short-term cost but it will have a long-term reward.

Third, target new products and services at the core 20 percent of customers, developing them solely for and with this group. In seeking to gain market share, try above all to sell more to your existing core customers. This is not, generally, a matter of sheer selling skills. Nor is it largely a matter of selling more of existing products to them, although frequent-buyer programs nearly always give a high return and raise both short- and long-term profits. But much more important still is developing improvements to existing products, or developing totally new products, that are wanted by, and if possible developed in liaison with, your core customers. Innovation should be grounded in the relationship with this group.

Finally, you should aim to keep your core customers forever. Your core customers are money in the bank. If any of them drops out, your profitability will suffer. It follows that quite extraordinary efforts to keep your core customers, that look as though they are depressing profitability, are bound to enhance it substantially over any meaningful time period. Exceptional service may even help short-term profits, by encouraging core customers to buy more. But profitability is only a scorecard providing an after-the-fact measure of a business’s health. The real measure of a healthy business lies in the strength, depth, and length of its relationship with its core customers. Customer loyalty is the basic fact that drives profitability in any case. If you start to lose core customers, the business is crumbling beneath your feet, whatever you do to dress up short-term earnings. If core customers are deserting, sell the business as fast as you can, or fire the management—fire yourself if you are the boss—and take whatever drastic steps are necessary to win the core customers back or at least stop the attrition. Conversely, if the core customers are happy, the long-term expansion of the business is assured.

Serving the core 20 percent of customers must be a company-wide obsession

Only a focus on the key 20 percent of customers can make marketing a firm’s central process. We started this section by looking at the shift from being production led to being marketing led. We then observed that the so-called excesses of the marketing approach were a result of focusing on 100 percent rather than 20 percent of customers. For the key 20 percent of customers, no excess can possibly be excessive enough. You can spend up to the limits of your cash and your energy and know that you will obtain an excellent return.

Your organization cannot be centered on 100 percent of its customers: it can be centered on 20 percent. To be centered on these is the main job of any marketing person. But this type of marketing is also the main job of everyone in the firm. The customer will see and judge by the efforts of everyone in the firm, seen and unseen. In this sense, the 80/20 Principle breaks new ground. It is central to marketing, it makes marketing central to the firm, but it also makes marketing the job of everyone in any organization. And marketing, for all the organization’s members, must mean providing ever higher levels of delight for the key 20 percent of its customers.

SELLING

Sales is marketing’s close cousin: the front-line activity to communicate to and, at least as important, to listen to customers. 80/20 Thinking, as we will see next, is just as crucial for sales as for marketing.

The key to superior sales performance is to stop thinking averages and start thinking 80/20. Average sales performance is very misleading. Some sales people earn over $100,000 per annum while a large minority barely beat the minimum wage. Average performance means little to these people or to their employers.

Take any salesforce and perform an 80/20 Analysis. It is odds on that you will find an unbalanced relationship between sales and salespeople. Most studies find that the top 20 percent of salespeople generate between 70 and 80 percent of sales.
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For those who do not realize the prevalence of 80/20 relationships in life, this is a pretty remarkable result. But for anyone in business, it holds an important key to raising profits in short order. In the short term, profits are tied to sales more closely than to any other variable. Why does the 80/20 Principle apply to sales and what can we do about it?

There are two sets of reasons why sales per salesperson vary so much. The first set relates to pure salesforce performance issues; the second to structural issues of customer focus.

Salesperson performance

Suppose that your analysis duplicates one recent example and you find that 20 percent of your sales personnel are generating 73 percent of your sales. What should you do about it?

One obvious but often neglected imperative is to
hang on to the high performers.
You shouldn’t follow the old adage: if it ain’t broke don’t fix it. If it ain’t broke, make damn sure it doesn’t break. The next best thing to staying close to your customers is to stay close to the top salespeople. Keep them happy; this cannot be done solely with cash.

Next,
hire more of the same type of salesperson.
This does not necessarily mean people with the same qualifications. Personality and attitude can be much more important. Put your sales superstars in a room together and work out what they have in common. Better still, ask them to help you hire more people like them.

Third,
try to identify when the top salespeople sell the most and what they did differently then.
The 80/20 Principle applies to time as well as to people: 80 percent of sales by each of your salespeople were probably generated in 20 percent of their work-time. Try to identify so-called lucky streaks and why they happened. One commentator makes the point well:

If you’re in sales, think back to the best streak you ever had. What did you do differently that week? I don’t know if ball players or salespeople are more superstitious…but the successful ones in each field tend to look at the conditions that were present when they were on a hot streak and try, try, try not to change them. Unlike a ball player, however, if you’re in sales, and you’re on a hot streak, change your underwear.
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Fourth,
get everyone to adopt the methods that have the highest ratio of output to input.
Sometimes it’s advertising, sometimes personal sales visits, sometimes focused mail shots, sometimes it’s making telephone calls. Do more of what makes best use of time and money. You could decide to analyze this, but it may be quicker and cheaper simply to observe how the top salespeople spend their time.

Fifth,
switch a successful team from one area with an unsuccessful team from another area.
Do this as a genuine experiment: you will soon find out whether the good team can beat the structural difficulties or vice versa. If the good team cracks the problem in the previously difficult area but the other team is foundering, ask the former team what to do: the answer may lie in splitting the teams so that some are left in each area. Recently a client of mine had terrific success in international sales but the domestic team was demotivated and losing market share. I suggested switching teams. The CEO demurred, because the export team had language talents that would be wasted in domestic sales. Eventually he agreed to release one of the international team, fired the sales director of domestic, and put the young man from international in charge. Suddenly, the previously unstoppable loss of market share was reversed. Not all such stories will have a happy ending, but in sales it is generally true that nothing fails like failure and vice versa.

Finally, what about
salesforce training?
“Is it worth investing in training the lower 80% of the salesforce to enhance their performance levels, or is it a waste of time because so many of them are destined to wash out regardless of training?”
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As on any issue, ask yourself what answer the 80/20 Principle implies. My answer:

• Only train those who you are reasonably sure plan to stick around with you for several years.

• Get those who are the best salespeople to train them, rewarding the sales superstars according to the subsequent performance of their trainees.

• Invest the most training in those who perform best after the first series of training. Take the best 20 percent of the trainees and invest 80 percent of the training effort in them. Stop training the bottom 50 percent, unless it is clear that you are obtaining a good payback even on this effort.