The Pareto Principle

Consultancy

Where does the profit come from in your organisation? Probably not from your biggest customers!

We find that most businesses follow the Pareto principle. This is a principle that states that 80% of the profits will come from 20% of your customers. Sometimes this can also have a direct correlation with turnover, but not always. Companies can have a range of products or services, some of which can be very high margined work that contributes significantly to the bottom line of your business. 

It is important to understand what is trying to be achieved before conducting in depth analysis of a customer’s client base. Not all programs are designed to increase profit, especially in the public sector. For the purpose of this article we will assume that the key driver behind the brief is growing an organisation's profitability.

It is vitally important that you can identify which of your existing customers give you that kind of contribution. This can be a revelation to many businesses. We have often found that companies clients have a very different contribution to how they have been perceived. It is not uncommon to find situations where a relatively small turnover company is providing significant profits, whereas large turnover clients are not always very profitable (this can be for a number of reasons including clients with large accounts demanding significant cost reductions in product pricing).

It is interesting to note that many businesses still devote far too much of their time looking after companies that are not part of their 20% most profitable clients. Understanding whom these individuals are, what they buy from you and why, is key to developing a new business strategy. You should also consider what part of your marketing spend you devote to these companies, informing them and reassuring them so that they stay loyal customers.

You should always consider the key strategies. The first is how to get some of the 80% clients to move upwards into being 20% clients. This is more often than not through a combination of cross selling and up-selling of products, improved client account management and through innovation and partnering with other organisations to provide an enhanced service. The second is the correct profiling of new business. Knowing the kind of business you wish to attract, what their key drivers are for choosing a supplier and understanding how long a client takes to develop the spending profile you desire, are critical in producing a robust client acquisition strategy. Developing a manageable pipeline forecast will support the company’s corporate strategy and help the board to grow at a sustainable pace.

These approaches need to be supported with correct content, channel identification and a robust customer contact strategy. Understanding the opportunities that a company has to put across key messages at critical times will significantly improve your cost of acquisition. The knowledge acquired will provide competitive advantage in your market place! 

Let me know if you think your business has similar issues or ambiguity in understanding where its profit comes from - you are not alone!

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