The 80/20 Rule and Your Market

We all know the 80/20 Rule, also known as the Pareto Principle.  We’ve heard it over and over and seen the power of the rule in our own businesses.  80% of our business comes from 20% of our customers.  80% of our problems are solved by 20% of our efforts.  The richest 20% of the people in our world own 80% of the resources.  It’s powerful because it’s true.  Unfortunately we don’t take the principle into consideration enough when we are looking at our markets and deciding where to spend our time.

Consider it as a balancing act except that given the rule, we should already know that things won’t be balanced (nor should they).  One of the steps I take my clients through is the identification of markets – the analysis of where they are selling their products and services today and the identification of other markets where those same products and services (or a slightly modified version) may be just as applicable with less competition and higher profits.

I had a discussion recently with a business owner who works in a competitive commodity market where only a very few exceptional businesses are able to rise above and work in the most profitable segment of the industry.  He believed that he needed to focus his efforts equally on the lower end of the market – the end that is consistent, but low value (the end that pays the bills on a regular basis) and the higher end of the market – the end that delivers significantly higher profits but slightly less frequently and with less reliability.

During our discussion we took a look at the types of people that he was selling to at each end of the market.  The service provided is exactly the same at both ends, but the value appears completely different to the consumer.  At the lower end of the market, his close attention to their needs, careful hand holding through a complicated and costly process, and experience and wisdom throughout a negotiation process can change his customer’s lives.  At the end of the transaction they are powerfully moved by the attention he has given them and extremely motivated to refer their friends and family to him based on a single transaction.

At the higher end of the market his clients may use his services less frequently, but given their significantly greater means they are likely to have dealt with complex transactions of this nature several times in the past, they may deal with more complicated negotiations on a regular basis as a part of their business lives, and they expect at minimum complete devotion to the transaction from the service provider not as a differentiator, but as entry to the game.  At the end of the transaction they are no more likely to refer their closest friends and associates (those with similar resources and who would deliver similar size transactions) than they were at the beginning.  A single transaction is not a game changer.

I encouraged him to look at the Pareto Principle when determining how to spend his time building relationships on an ongoing basis. 

So if we consider the power of the 80/20 rule, where should he spend the bulk of his efforts?

Simple… the high end of the market.

I accept the fact that the low end of the market is consistent, pays the bills regularly, and keeps the kids in school, but I don’t accept the fact that by default that means that it deserves the same attention.  Certainly during an individual transaction the same energy, effort, and integrity needs to be applied to people on both ends of the network, but when the lower end transaction is complete I contend that the effort driven CRM activities are also done.  Using automation to send quick happy birthday emails or to keep in touch via e-Newsletter is one thing, but actively picking up the phone to solicit referrals or with a former client in the low end of the market a happy anniversary is time that you will never get back.  Those people are already going to refer business to him based on his superior customer service during the transaction – they don’t need more attention.

At the high end of the market, personal touch is much more important.  Taking a former client out for lunch every six months, touching base just to see how their business is building, or sending a hand-written card with a stuffed teddy bear on their children’s birthdays might take more time and require a bit more effort, but if through those activities you can crack that person’s most personal and valuable network then it is time well spent.

My suggestion was that he spend 80% of his time developing relationships with the top 20% of his client base.  The other 20% of his time will be spent in the low end of the market paying his bills – but over time he’ll find that the ‘low end’ of his client portfolio is creeping upward into the more profitable segment of the market.

Doing the relationship management piece right is just as important, but that’s a topic for another day.  Today it is important to simply remember the Pareto Principle.

Focus 80% of your effort on the most profitable 20% of your business while maintaining your values, integrity, and differentiating service levels and you can’t help but grow your business over time.

I’d love to hear about how you apply the principle in your business.  Feel free to share your comments below.

About Tim Empringham, MBA
Tim Empringham is a passionate advocate for Innovation in organizations of all sizes as a mechanism to drive growth, create uncontested market space, create new customer value, and drive efficiency into the internal organization. His focus is on disruption of thinking and markets through integrative thinking, structured Innovation frameworks, and leadership development of Innovation and Change leaders within the organization.

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