I'm sure many of you have heard of the 80/20 rule (aka the Pareto Principle) but I think it's worth reviewing.
The 80/20 rule means that 80% of the result comes from 20% of the input.
The rule was developed by an Italian industrialist and economist named Vilfredo Pareto. He was a pretty smart guy and in the late 1800s observed that the majority of the wealth in Italy was owned by a minority of the people. Once he'd recognized this, he started to observe other phenomena and realized that the rule held true across a number of different cases.
And, it's still a good rule of thumb today. Microsoft has reported that they've eliminated 80% of errors and crashes by fixing the top 20% of reported bugs.
So, what does this mean to you?
Well, in most cases the majority of your revenue comes from a few customers. A lot of us spend a significant amount of time on the wrong activities and/or the wrong clients. By figuring out which 20% of your customers deliver 80% of your revenue, you can save a lot of time and effort by focusing on those customers.
Finding your Top 20
To identify your top 20% of customers who generate the most revenue, make a list of all of them and the total amount of sales you've received from each over the past year. You can use the Top Customer Identification sheet to track them (see template below). The sheet will also calculate the proportion of your company's total sales delivered by each customer.
Once you've entered all of your customers, sort the sheet in descending order by the % of Total Sales column. This will put the customers who deliver the greatest amount of revenue at the top of the list.
Finally, add the percentages together from top to bottom until you reach 80% - these are your Top 20.
By focusing on those customers, you will get the biggest return on your effort.
One thing to note: It's not always an 80/20 split. It could be that 10% of your clients deliver 95% of your business. The split is not the important part. The important part is that a small portion of your customers deliver the great majority of your income and you need to know who they are.