Distinguish Your Company’s Elite: Follow the Pareto Principle
Even in America, not all customers are created equal. If you apply the "Pareto Principle" to your sales department, you're likely to make two discoveries: 80% of your revenue comes from 20% of your customers and 80% of your sales are generated by 20% of your sales team. The ratio varies by industry, and for some companies, the concentration of results is extreme:- 0.5% of car rental customers rent some 24% of cars,
- 5% to 15% of long-distance callers make up to 60% of all long-distance calls, and
- 25% to 30% of customers at some banks account for every nickel of profit.
- Pamper your top buyers.This will pay dividends in the long run. For example, preferred customer packages at a hotel could include fast check-in, rooms based on past preferences and other perks. Customers at a service station who buy a certain amount of gasoline a year might be offered a free oil change. This 20% group is most likely to recommend your business to family, friends and colleagues.
- Know your real estate. Focus on the areas of your business that produce the most sales. Take a tip from McDonald's. The fast food chain pares its menu so that it offers only what sold. That let McDonald's focus on quickly serving just what customers wanted.
- Target your marketing.Some ads just don't pay off. In fact, 80% of your new leads probably come from 20% of your ad spending. Direct mail has a broad reach but often winds up in the trash. Target your top customers with media ads, e-mail and cell phone alerts — and Internet leads.
- Work smarter.Solve the 20% of problems that cause 80% of your troubles and you'll see a big return. And small problems might just solve themselves when the bigger pieces are in place. Establish specific sales goals, plans for reaching them and clear responsibility for achieving them. Base the rewards, including commissions, on results.
The Pareto Principle in Action
Vilfredo Pareto was a 19th-century Italian economist who found that 80% of the world's wealth belonged to 20% of its population. In modern business, the 80/20 rule is applied in a variety of situations, including:
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