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Business Tip of the Month

Business Tip
of the Month
For the month of July 2002

Use the 80-20 rule to increase your business profits

How well do you know your customers? Which ones are the most profitable? Which ones take most of your time? It's worth taking the time to find out. If your business is like most, the 80-20 rule applies. That is, 80% of your profits come from 20% of your customers.

If you can identify that top 20%, the benefits are:

  • You can work extra hard to make sure this group remains satisfied customers. Sometimes all it takes is an appreciative phone call or a little special attention.
  • By understanding what makes them profitable, you can work hard to bring others into that category.

Keep in mind that it's not always profits alone that make a good customer. Other factors, such as frequency of orders, reliability of the business, speed of payment, and joy to deal with are important too. Ask your accounting staff; ask your sales staff. You'll soon come up with a list of top customers.

There's another way in which the 80-20 rule applies to your business. You'll likely find that 80% of your problems and complaints come from 20% or fewer of your customers. If you identify those problem customers you can:

  • Change the way you do business with those customers to reduce the problems.
  • Change your pricing for those customers so that at least you're being paid for the extra time and effort they require.
  • Quit wasting your precious time, effort, and resources. Sometimes the only solution is to tell these customers that you no longer wish to do business with them. This solution may improve employee morale, and it may free up more time to serve your top customers and gain new ones.

The bottom line is that a business earns its revenues through interactions with its customers. Understanding your customers better can only help your business. Contact us if you need help analyzing your customer profitability.

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