must have come across the Pareto principle
on which this rule is based. It says that
80% of the outcomes will come from about
20% of your effort. It can be applied to
many aspects of your sales & marketing
80% of your profits may come from just
20% of your customers.
of your sales may come from just 20% of
your products and services.
simple rule has a scientific basis, &
help you to understand how effective your
sales/marketing efforts are. It gives you
interesting & useful insights. It shows
how you operate & where you should be
focusing your resources.The '80/20 rule'
is a simple way of looking at your sales
and profit figures and identifying the largest
sources of contribution. Let us see how
to use this technique to find profitable
customers,products & services, which
channels to market you use are most profitable.
it is important for sales / marketing planning?
We have wide variety of customers to cater
to. Some are more important than others
and some cost you more than others. Knowing
which customers are the most profitable
helps in a number of ways:
can make sure you are really looking after
will understand what makes them profitable.
can use the finding to find other customers
who are can be profitable.
number of profitable customers & reduce
ratio of 80% and 20% is not sacrosant which
work out exactly in all situations, nor
do they need to add up to 100%. Ratios such
as 80/35, 80/25 or even 80/10 may equally
apply. The principle is that, in each case,
we are seeking to find the source of the
majority of whatever activity is being measured.
We will observe following conclusions from
A small proportion of your efforts provide
most of the result.
large proportion of your efforts provide
a relatively small result.
is a limitaion to this rule: If you use
historical data, it may not provide an accurate
or realistic indication of the future sales
or profit potential from customers, products
and services or distribution channels. You
need to take a view on how representative
the data used is. Using data from more than
one period will be more representative.
to use thus tool?
So how do you apply this to your business
to achieve a better understanding of your
marketing activities? There are several
key areas of your sales/marketing activities
that you should consider analysing. These
Sales per customer.
of products &/or services.
of products and services.
and margins per channel to market (direct
sales force, distributor sales, web sales,
are the steps to follow to analyse any of
Calculate the values (sales or profit)
contributed by each of these activities
(customers, products/services or channels)
over a given period and add to give a
total. The period of analysis may be a
year, but could equally be a quarter or
even a month. The customer activity in
this period should not be biased by any
seasonal fluctuations in ordering patterns.
the values for each activity in descending
order & calculate the value of each
activity as a percentage of the total
for the period.
the cumulative percentage in descending
the row in your data where the cumulative
percentage is approximately 80%. Then
look across to see what proportion of
the activities account for the 80%. For
example, if 5 out of 24 customers account
for 80% of sales, 5/24 = 21%. The ratio
in this case is 80/21: 80% of sales come
from 21% of customers.
possible, compare this information with
results from other periods (say a previous
year) or with an average for the industry.
interpret & apply your results to
the weak & strong areas as shown by
are you waiting for?
Try applying the 80/20 rule in your business,
and see what new insights you can find.