The 80/20 rule, or Pareto Principle, says that 80% of the outcome is generated by 20% of the activity.
There is a temptation to take this for granted as ‘the norm’ and to expect it to be true in most circumstances.
In my experience, the 80/20 rule doesn’t have to be the norm, and is in fact an indication that structured approach and a brand-led strategy has not been applied.
Welcome to the tenth in my Growth Metrics series of articles. In this edition, I’m going to delve deeper into why the 80/20 rule applies so often, what it indicates, and the way in which Client Based Management (CBM) can negate it.
Client Based Management is essentially how you measure the value that you are delivering to your client as well as the value being returned to your organisation.
When I walk into a lot of organisations, I find if they haven’t structured products into categories and built different offers for different personas, they will often be experiencing the 80/20 rule in their revenue and margins.
If, however, they have a brand-led strategy, with a product ecosystem, a channel strategy and an effective sales process, the Pareto Principle is minimised.
After working with them to implement a brand-led strategy, the next measurement we look at is the profitability of each of their client sectors. Quite often businesses will discount the top end of the product to get volume, and offer standard pricing to bottom end to get margin, leading to reduced margins at both ends of the spectrum.
It’s crucial to know the margin throughout the ecosystem, and for that a business relies on the right measurements. But it’s so easy to get caught up with being busy that measurements sometimes fall by the wayside. Before they know it, they’re winning in one area, but losing in another.
Client Based Management is a useful tool for understanding the value of each category, and ensuring that you are making margin on each category and 100% of clients. It helps a business to organise clients into more effective categories, and decide on a course of action for those groups that are not profitable - which might be upsell, sell off or let go. The resources this frees up can then be redirected to work on the more profitable clients. Interestingly, it is quite often the case that the clients who aren’t making you money are also taking the most energy to manage, so there’s an additional bonus in stopping the ‘energy drain’ that they represent.
The 80/20 rule tends to apply in businesses that take a bottom-up sales led approach. If your analysis shows that the Pareto Principle applies in your business, this is very likely to be the cause. It is much less likely if you have implemented a top-down, brand-led strategy, and have a brand and product ecosystem with well structured client categories, channels who are pre-selling and pre-qualifying, (ie putting each client in right category) and have a healthy good conversion rate.
Client based management is about having the insight to understand margin profiles across your entire client base and managing those clients to generate a healthy margin across your entire client portfolio.