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Challenging the 80:20 Rule
By Ian Brodie | March 5, 2008
It’s probably the best-known and most-repeated rule in sales: 80% of your sales come from 20% of your customers. The implication is that you should focus the majority of your sales efforts on those 20% to maximise your returns.
But it’s also the most misunderstood and misused rule in sales. Slavishly following the 80:20 rule could cause you big, big problems.
The first question to ask about the 80:20 rule is “is it true?”.
Well, the answer is “usually”. There are many industries where sales do follow some sort of 80:20 or 60:15 or other uneven split. But there are also industries where it doesn’t - where the spread of sales is pretty even across customers. So it’s absolutely crucial that you know the numbers in your industry and don’t end up putting all your eggs in the wrong basket.
The second, more important question is: “OK, there is an 80:20 split in my business - but does it persist over time?”. In other words - are the 20% of customers who make up 80% of your business going to be the same today as next year?
In this case, the answer is very often “no”. And this can be a huge trap for sales people who focus their efforts too heavily on today’s big customers. In very many situations today’s big customers may not be tomorrow’s. Takeovers, changes of management or changes of strategy often result in big changes in the amount of products and services being bought - and in who they are bought from. And in many industries there is a natural cycle of peaks and troughs in purchases. For example, if you sell PCs and your top customer is one who has just bought new equipment for all its employees this year, then the chances are that it won’t be buying so much from you next year - no matter how much effort you devote to selling to it. Not that you won’t sell anything - but the big round of purchasing is done, and you really need to be looking at other customers to drive your growth for the next year.
So the key message here is to be aware of fluctuations in the 80:20 rule. Look at your historical sales and analyse whether the composition of the 20% of customers who make up 80% of sales varies significantly year on year. And if it does, you need to watch carefully and invest time and effort in nurturing new customers to rise up into the top 20% rather than spending all your effort on the current 20%. Focus on sales potential to drive your efforts rather than just historical sales.
The final question to ask is: “Even if I know my top 20% - does that mean I should devote most of my attention to them?”
The answer here is “usually yes - but not always”. It’s common sense to focus on your highest potential customers. But there are sometimes diminishing returns to any extra efforts if you are already devoting a lot of time to a customer. I helped a pharmaceutical company grow its sales a few years ago and one of the things we analysed was their call frequencies for different groups of customers. One of the surprising findings was that making more vists to high potential customers did not result in any significant increases in sales. By and large, the high potential customers were already being very well served and any extra visits were just overkill. In contrast, we identified specific customer segments with lower overall potential - but where the incremental sales generated by an extra sales call were much higher.
In all three cases the key is to look beyond the simplistic 80:20 rule to check:
- Does it really apply in my business?
- Does it persist over time - or do I actually need to focus on “rising stars”?
- Will extra effort on my top 20% really increase sales - or are they already being fully served?
Now don’t get me wrong - the 80:20 rule can be very helpful as a simple guide to where to focus your effort. But thinking beyond the simple rule will pay big dividends for sales people willing to invest their brain power and challenge the accepted norms.
Onward!
Ian
Topics: Sales Strategy |
March 9th, 2008 at 4:34 am
Great article Ian! I included you in this weeks Carnival of Sales & Management Success…
Where I work we had clear 80 / 20 rule, and ended up dropping some of the BIG clients for even bigger and more profitable ones. It was hard to step away from the easy feeding trough, but a lot of these clients were high volume and low profit. The new ones are high volume high profit, and they are even happier to be working with us than the first ones were. Now I am in a service industry, and am limited in how many people we can actually effectively serve, so sometimes it makes sense to walk away from a client… but even if you could have unlimited clients, sometimes it makes sense to step back and re-think relationships and decide if they should continue.
Thanks for the great article.
-Brad
March 10th, 2008 at 11:39 am
[...] On another note, Ian Brodie of the Sales Excellence blog addressed the issue of the infamous 80/20 rule. You can find is advice on dealing with rule within your particular business here. [...]
June 26th, 2008 at 12:43 pm
[...] time debunking management myths nowadays (see Debunking the myths of non-verbal communication and Challenging the 80:20 rule). This one has been brought back to my attention by a seminar I recently attended run by some [...]