Is Your Sales Department Using Its Time Wisely?
September 2019
In the late 1800s, an economist named Vilfredo Pareto developed the Pareto principle. The Pareto principle, often referred to as the 80/20 Rule, suggests that for many events, 80% of the effects or outputs come from 20% of the causes or inputs. Things in life and in business are not distributed evenly.
When applied to business, the 80/20 Rule has been utilized as a tool to identify realities, such as:
-80% of a company’s sales come from 20% of its customers
-80% of a company’s profits come from 20% of its products
So, how is your company’s Sales department using its time each day? If 80% of a Sales department’s efforts are spent focused on 20% of its customers, they better be the right customers! And, the right customers look different for every company. To apply the 80/20 Rule to your customer base you first must understand who your ideal customer is.
Some companies may focus on high volume, low cost sales while others may focus on low volume, high cost sales. Other differentiators between you and your competition may be the level of product quality, on time performance, and customer service offerings. Also, your ideal customer may need to generate at least “X” Sales dollars annually or hit a certain margin of profitability.
Once you know what your ideal customer looks like, you need to step back and spend time rating your current customer base. Which customers get an “A” ranking because they fit the niche or target market your company is filling? Which customers get a “D” ranking because they don’t fit your target market? A “D” customer may be one that results in very low profit to your company, but you spend an exorbitant amount of time servicing.
Now that your customers are rated, it is time to set the 80/20 Rule in motion. Are there customers that were given a low rating that are salvageable? Could you take steps in your Sales plans to move that customer from a “D” to a “B” rating? Consider actions such as price increases, minimum order quantities, or long-term agreements. It is important to assess these customers and either find ways to improve performance and ranking or exit the customer.
And never forget about the “A” ranking customers! These are the customers that you should be spending 80% of your time on. Are there any “A” customers that you don’t pay enough attention to? Chances are the answer is “yes”, and there are most likely opportunities to create a deeper relationship with those customers and grab more business.
Too many companies are afraid of losing ANY customers, but not every customer is worth having! Recently, we helped one of our client’s utilize the 80/20 Rule on their customer base. They ranked their customers and developed action plans for each account with a low ranking. The first area of focus was to eliminate all “D” customers by either raising the requirements and expectations of that customer (getting them to a “C” or higher) or firing that customer. The number of customers this client worked with shrunk by 25% while going through this exercise.
The next area of focus was having the Sales department dedicate the majority of its time to the “A” and “B” customers. These were the customers that most valued what the client offered and were providing the client with most of its profit. Deeper relationships developed with these customers, reliance and trust formed, and increased sales and profitability dollars inevitably followed. This client’s overall sales increased by 20% over the next year and net income doubled. The Sales department was certainly now using its time wisely!
When increasing the value of your business, one of the critical areas is customer quality, diversification, and profitability. Implementing the 80/20 Rule will help you prioritize your time, provide continuous reassessment of your customers, and either improve their overall contribution or exit them as a customer. Are you focusing on the right customers?
Kelley Ramos, CPA, is a consultant with Journey Consulting, LLC, in Green Bay