It's probably the best-known and most-repeated rule in sales: 80% of your sales come from 20% of your customers. The implication is that you should focus the majority of your sales efforts on those 20% to maximise your returns.
But it's also the most misunderstood and misused rule in sales. Slavishly following the 80:20 rule could cause you big, big problems.
The first question to ask about the 80:20 rule is “is it true?”.
Well, the answer is “usually”. There are many professions where sales do follow some sort of 80:20 or 60:15 or other uneven split. But there are also professions where it doesn't – where the spread of sales is pretty even across customers. So it's absolutely crucial that you know the numbers in your business and don't end up putting all your eggs in the wrong basket.
The second, more important question is: “OK, there is an 80:20 split in my business – but does it persist over time?”. In other words – are the 20% of customers who make up 80% of your business going to be the same today as next year?
In this case, the answer is very often “no”. And this can be a huge trap for business developers who focus their efforts too heavily on today's big customers. In very many situations today's big customers may not be tomorrow's.
Takeovers, changes of management or changes of strategy often result in big changes in the amount of products and services being bought – and in who they are bought from. And in many industries there is a natural cycle of peaks and troughs in purchases.
For management consultants, for example, there is often a natural cycle of entry into a client firm, followed by an expansion period where you build relationships with more client executives and sell more work. However, there is also a natural decline as the issues you were brought in to deal with are addressed, and the clients begin to take over much of the work and the capabilities to do it themselves.
The key message is to be aware of fluctuations in the 80:20 rule. Look at your historical sales and analyse whether the composition of the 20% of customers who make up 80% of sales varies significantly year on year.
And if it does, you need to watch carefully and invest time and effort in nurturing new customers to rise up into the top 20% rather than spending all your effort on the current 20%. Focus on sales potential to drive your efforts rather than just historical sales.
The final question to ask is: “Even if I know my top 20% – does that mean I should devote most of my attention to them?”
The answer here is “usually yes – but not always”. It's common sense to focus on your highest potential customers. But there are sometimes diminishing returns to any extra efforts if you are already devoting a lot of time to a customer. Sometimes spending more time with an “underserved” client can produce a much greater impact on sales than holding yet another meeting with your favourite client.
In all three cases the key is to look beyond the simplistic 80:20 rule to check:
- Does it really apply in my business?
- Does it persist over time – or do I actually need to focus on “rising stars”?
- Will extra effort on my top 20% really increase sales – or are they already being fully served?
Now don't get me wrong – the 80:20 rule can be very helpful as a simple guide to where to focus your effort. But thinking beyond the simple rule will pay big dividends for sales people willing to invest their brain power and challenge the accepted norms.