The Pareto Principle - How It Can Help in Your Business

 For businesses looking to grow, the general statement "We need to find more customers" can become a precarious sales directive. What businesses need to strive for are the right customers, ones that drive profitability upward. This brings us to the following question; who are these "right" customers? Applying the Pareto Principle, also known as the 80/20 Rule, you can easily define who the right customers are for your business.

The business-management consultant Joseph Juran made the assertion in 1941 that 80% of the effects come from 20% of the causes. Juran dubbed the principle "Pareto's Principle" after the Italian economist Vilfredo Pareto whom in 1906 observed that 80% of the land in Italy was owned by 20% of the population.

While the Pareto Principle has seen a few decades pass since its inception, the theory behind the principle is timeless. Some business examples of the Pareto Principle are:

- 80% of your profits come from 20% of your key customers, 

- 80% of your sales come from 20% of your key products or services, 

- 80% of your defects come from 20% of your products.

A Pareto analysis will underscore the market's perception of the business by identifying the key products or customer demographics. Through the actions of your customers, the Pareto Principle will help you to refine the business' model to further satisfy the market. The influence of the Pareto Principle within the business will appear in the tactical planning for sales and marketing, departmental staffing, product or service design and inventory allocation.

How can this simple principle help my business? Focusing upon key customers provides reductions in transaction costs and operational complexity. Marketing programs can be cost effectively scaled to reach potential customers of similar makeup or demographics as your key customers. As the number of transactions and operational complexity decreases, an opportunity will present itself to reallocate staff to maximize their contributions. Determining the key products, excluding complimentary offerings, provides an opportunity to simplify services and reduce product varieties. Reduction in product or service variety will allow narrower inventories resulting in better cash flows.

What happens to the Customers we discourage over time? With any luck these ex-customers will gravitate toward the competition, increasing their lead time and costs.

Operational complexity is a businesses' worst enemy. Not only is complexity challenging for the employees, complexity can quickly become frustrating for customers. The Pareto Principle will help identify opportunities to simplify and allow the business to truly focus upon the needs of the customer!

Are Managers Using the Wrong Incentives With Their Salespeople

 The way to improve performance, increase productivity and encourage excellence is to reward the good and punish the bad. This is the assumption that too many organisations have based their decisions on throughout the last century and in the first decade and a half of this century.

Sometimes this carrot and stick approach works but many times it doesn't. So what do you need to do, raise the rewards and get tougher on the punishments?

As I write this, I have in mind two sections of industry that use this almost to an extreme. One is the new homes market, the other is the motor vehicle trade. A lot gets written about the motor vehicle trade and the pressure put on salespeople to meet their quotas but far less is said about people management in the new homes sector so I'll use them as my example.

It amazes me that people with the skills and knowledge to build beautiful new homes are such pathetically poor managers of people who have clearly never heard of the '3 Dimensions of Job Satisfaction'. I'm sure there are exceptions, but they are definitely in the minority and the industry has a culture that breeds fear of failure and survival of the fittest amongst its salesforce. This leaves little room for a customer focussed approach where the joy of helping the customer select the right house for them that is in the right location at the right price is in itself fulfilment.

They reward the high performers with excellent commissions, huge bonuses, overseas trips and sales awards. For those who fail to meet their targets, who are viewed as 'burning leads', as being 'poor closers' there is the threat of dismissal. So, what happens? Fear sets in. It affects their confidence, clouds their thinking, tempts them to take shortcuts and they end up being fired... even though they may have been the ones picking up the awards and bonuses six months before.

The strange thing is that these companies design and construct great houses, using excellent systems and wouldn't dream of taking shortcuts in the building process. Yet their assumptions about how to motivate and incentivise people make life difficult for them as managers, create a fearful work culture and cause ongoing problems.

It's time that managers questioned their assumptions about how to motivate people and looked at alternative approaches. Until managers learn to be a coach reinforcing the positive behaviours with praise and helping their team to work through problems, they will constantly be under pressure and will infect their sales team with a fear of failure.