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What does a 19th century Italian economist have to do with your business?

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Friday October 22, 2010 at 11:00am
When Italian economist Vilfred Pareto observed that 80% of Italy’s income went to 20% of the population he probably never realised he was on the verge of a discovery that is the core to understanding the strength or otherwise of many businesses today.

Pareto discovered that this 80/20 rule applied to all manner of things, for example 20% of the pea pods in his garden contained 80% of the peas, and today 80% of the world’s personal wealth is held by the richest 20% of people.

It’s a general rule of thumb in business that 80% of your revenue will come from 20% of your customers (or from 20% of your product offering).

Getting to grips with a Pareto analysis for your own business could be really revealing and help determine where most effort should go in serving customers.

When we do this kind of analysis with clients it often reveals how reliant they are on just a handful of customers. If one or two of them defected they would take with them a large proportion of total sales. It can often also reveal the large number of smaller customers who take a great deal of time to serve but only generate a small percentage of sales.

One of the key questions we ask is, “Could time spent serving the minnows be better spent on the larger customers?” The ensuing discussion focuses on strategies to move customers upwards and see spend increase accordingly.

The 80/20 Analysis is a real eye opener. We know that what you can measure you can manage, and armed with this information your management decision making will improve dramatically.

Oh, and of course if 80% of your headaches are caused by 20% of your customers, it might be time to
move those customers onto your nearest competitor!

Andy Parker
Chartered Accountant

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