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What does a 19th century italian economist have to do with your business



Submitted By Allan Reid of McLean Reid - Accountants in Aylesford
Category Type: General Interest News Item

Date Submitted: 01-09-2009 19:10:27


Without going into an in-depth history of Vilfred Pareto, he observed that 80% of Italy’s income went to 20% of the population.  Interestingly, this observation translates to business extremely well.  As a general rule, 80% of your revenue will come from 20% of your customers (or from 20% of your product offering).


So, knowing the basics of the 80/20 Rule, who are the customers that occupy the top 20% of your customer base?


Here are 3 quick steps to get you started on your own 80/20 Analysis:



  1. Print out or list the sales ledger for the most recent financial year by customer/client account number.
  2. Aggregate the information by “Bands” eg 0 - £1,000, £1,001 - £10,000 etc depending on your business*
  3. Do the same again by product type (for an alternative 80/20 analysis).

Here’s what might typically be found:













































Customer size*

% of
customer base

Number of customers

% of total sales

Total sales

Comments


Extra Large

1

9

25

1,170

5% of the customer base is contributing more than 50% of the businesses sales


Large

4

35

27

1,300


Medium

16

139

30

1,450

 


Small

79

687

18

835

79% of the customer base only contributes 18% of total sales


Total

100

870

100

4,755

 


* Remember this is a rule of thumb, so do not spend too much time defining your customer segments – near enough is good enough.


So what does this 80/20 Analysis tell us?


This business is heavily reliant on the top 5% of their customer base. If one or two of them defected, they would take with them, a large proportion of total sales.  It is also evident that a lot of time is being spent serving smaller customers, when they only contribute 18% of sales. 


One of the key questions we should be asking is, “Could time spent serving 79% of the customer base be better spent on the larger customers?  The ensuing discussion should focus on strategies to move customers in the large bracket to extra large, and then turning medium sized customers into large customers.


lease let me know if you are interested in discussing this further. The 80/20 Analysis is a real eye opener. We know that what you can measure you can manage, and armed with this information your management decision making could improve dramatically.


P.S. If 80% of your headaches are caused by 20% of your customers, it might be time to move those customers onto your nearest competitor!


http://www.mcleanreid.co.uk/tip-of-month/08-july-pareto.htm




Date Last Modified:- 01-09-2009 19:22:13


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