On a day to day basis my firm’s role is to get to the bottom of what is going on in a business, understanding better how the results are generated and what the main drivers of profitability and revenue are to provoke positive change.
The 80/20 principle exists in most things and this analysis is key to understanding which customers, services or products truly drive results. It has always surprised me how consistently we see that 20% of customers generate 80% of the revenue and/or profitability of a business.
It is rare that the ratio is more even at 70% of revenue from 30% of customers, but frequently we see 90/10 split, or even worse. Bearing in mind the risks and the effort being expended around the 80% producing just 20% – what can be done?
Once you’ve identified what your key 80/20 principle is, grading customers is crucial and whilst there are differing views, I am a big fan of A to E grading, with As as your top-end clients, Cs as entry-level clients, and Es as clients who don’t really fit with what you’re doing. Broadly, the categories work out like this:
A. They trust you and are happy to pay more for the extra attention they receive.
B. Broadly Cs but have the capacity to become A’s and receive more of your services and products.
C. They are happy to receive your entry level services and products for a fair price, but do not presently have much capacity for more.
D. They could be Cs but it’ll be a stretch as they are overly price-conscious and demanding.
E. They will, unfortunately, never fit the profile of your ideal customer and you are losing money on them consistently.
The strategy following that should be fairly simple, provided of course, that you have the confidence to implement it. At the top end you must of course keep looking after your As but it may well be the most growth potential can come from investing significant effort with your Bs. It is also pretty clear you need to ‘take a view’ with your Ds and immediately sack your Es. Whilst it maybe a little scary it should not be too much of a leap of faith when you consider the 80% of resource and effort you’re spending on the Cs to Es for only 20% gain!
The goal is to get the business to the point where you only have As and Cs. By doing that your over-reliance on 20% of the good business reduces, your risk profile improves, all your good customers are more satisfied and you become more profitable, as more often than not you are left with more time to do better business with customers who really want what you can deliver.
Strangely enough, we have recently mentioned to one of our suppliers that they should ‘sack us’ as a customer on the grounds that they would be more profitable if they did so, and I’m pretty sure we’re a D for them. I know though that we should definitely be a C or in the future perhaps even an A – you know who you are and the gauntlet has been thrown down!