I have found the Pareto Principle (sometimes known as the 80/20 Rule) to be a valuable tool for small business owners. It has served me well for over 25 years. In this post I will look at how you can apply the Pareto Principle to your customer care (or client management).
Not all your clients are contributing to your profits. Some of them will be losing you money. Some will be very demanding of your after-sales support team. There will be other clients who you never hear from. They simply get on with using your products/services.
The Pareto Principle states that 80% of your profits come from 20% of your clients. Also 80% of your after-sales queries will come from 20% of your clients. If you are large enough to employ sales staff, then 20% of your sales staff will produce 80% of the revenue. 80% of your sales team will only generate 20% of your business.
How does this help you, the small business owner?
Firstly, if you can define in detail what the most profitable 20% of your clients look like, you can then refocus your marketing to attract more prospects that match this profile. The likelihood is that these prospects will also turn into highly profitable clients. Of course, there is no guarantee of this happening, so you must continually monitor the ongoing profitability of each client.
What you are doing here is winning more clients with a similar profile to your most profitable ones. The reverse is also true. 80% of your clients will generate only 20% of your profits. It is worth evaluating which of these clients are loss-making and put in place strategies to return them to profitability. For those that cannot be made profitable, the only option left is to encourage them to defect to your competitors.
Some of your clients will make a disproportionally high demand on your after-sales department. It is unlikely you will have made sufficient allowance for such heavy use of your support staff. The cost of servicing their ongoing demands will exceed your post-sales budget and almost certainly means you are actually losing money. 20% of your clients will spend 80% of your post-sales support budget.
You need to monitor which of your clients fall into this category and start charging them for their high level use of your after-sales department. As soon as you do this, the demand on your support team will begin to drop.
It won’t be too hard to monitor the demands made by individual clients – simply introduce a “Support Ticket Scheme” where you allocate a unique support desk number in return for the client identifying themselves. Keep a record of which clients make demands on your after sales department. For the most demanding clients, you have to assess how best to proceed and where it is practical to do so, discuss the situation with each client individually. Some will be happy to pay for the additional support they require from you. Others might agree to pay for some training from you to enable their staff to be more self-sufficient. There is no one solution to reducing the demand on your support team so you need to resolve the problem with each client individually.
With your sales people, 20% of your sales staff will generate 80% of your revenues. These are the people who you must really look after. What often happens is that the most successful salespeople are largely left alone and their performance taken for granted by business owners.
It is understandable why owners exhibit this behaviour but it is equally very short-sighted. This complacency towards their best salespeople comes about because of the huge demands on the business owners’ time. They never find time to manage and motivate their best salespeople because other, more pressing, actions take priority. Eventually the sales person gets fed up delivering top-drawer sales figures for little recognition and thanks.
Small business owners soon regret spending far too much time managing and monitoring the other 80% of their sales team – the group producing only 20% of the revenue. If you are guilty of this, realign how you invest your time and effort. Do whatever you can to support your top 20% of sales people – they are proven to deliver a string of successful sales. Help them to produce more by allocating the necessary resources to improve their productivity – sales support, product support and administrative support.
Consider reviewing your recruitment activities so that you are constantly looking for new sales staff matching the same profile as your most successful ones. This realignment of your time does mean you have less time to spend with your poorer performing salespeople. Use this time wisely. Focus on those sales people you think will become successful. Give them specific targets that allow you to measure their performance levels regularly and confirm they are on-track to become one of your top salespeople.
The others, I’m afraid, aren’t really up to scratch and need to be eased out of your company.
- Allocate time to analyse your business from the 80/20 perspective. See if it exhibits the same characteristics as described here.
- Begin to focus on those areas of your business which could leverage more revenues and profits with minor management changes and only modest investment.
- Look closely at the effectiveness of those involved in selling. Are they cost effective? Are they productive enough to generate sufficient revenues? Do any require excessive support and management? Put in place an action plan to bring each individual up to the required level.