The 80:20 rule | A powerful concept for SME’s

0
155

Paul Dalton | Business Consultant | Leapfrog Projects | mail me |


South Africa has a very eager and vibrant entrepreneurial spirit and community.

This is fortunate because if we are ever to make an impact on the massive requirement for job growth in this country, it is from small and medium enterprises (SME’s) that it must come.

Recently Statistics South Africa revealed that South Africa had lost approximately 260,000 jobs in the second quarter of 2018.

The unemployment rate is at a 15-year high of 27% and our economy hasn’t grown at more than 2% since 2013. Against this backdrop, how can we ensure that SME’s survive, grow and thrive?

The 80:20 rule

The 80:20 rule is also known as the ‘Pareto Principle’ or the ‘law of the vital few’.

It states that 80% of your results come from just 20% of your actions and it can be applied to many factors such as time management, sales and marketing.

Applied to various industries, this power-packed idea has enabled radical transformation of the status quo:

  • The computer revolution took off when developers realised that we only use 20% of the functions of a PC and created RAM to load these faster.
  • The Japanese manufacturing industry dominated the world in the 1970s after they decided to first tackle the few processes 20% causing 80% of the defects, in other words they realised that not all issues were equal and focused their attention allowing their quality and sales to soar.

I found that there is much info out there on defining the 80:20 principle and its effects but it’s difficult to find any practical advice on how to apply the rule to a business.

So I’ve spent ten years of my life dedicated to documenting, deploying and measuring the effects of specific actionable insights from the 80:20 rule.

I designed a powerful yet simple three step approach towards creating a profitable business, borrowed from the lessons of 80:20 rule.

Unlock cash

One of the most powerful insights to come out of the 80:20 rule is that one in five of your existing clients is willing and able to pay you four times more right now, for the right value.

This is a universal truth that businesses simply don’t extract all available cash from existing clients, products and services.

Either your clients don’t know the full extent of your services and so only buy a little of what you offer or their landscape has changed and you haven’t revisited them to ask if they need more from you. Either way, you’re leaving money on the table.

A simple revisit to your existing client base could yield an extra 20-30% turnover in a matter of weeks. What’s great about this nugget of wisdom is that the expense is way less than marketing for new clients and most business can accommodate another 20% in sales without incurring more fixed costs, so this little gem of an exercise should make the gross profit drop straight to the bottom line.

More profitability

The next step is way more strategic. Again, using the 80:20 rule and applying it to our offerings, we’ll find that 80% of our real profits come from just 20% of our product or service mix.

If we investigate our product offering and mix, as well as opportunities within and adjacent to the existing business such as new products that are currently under exploited, we can start to map the true (net) profitability of each of the products within the business and then we simply move the focus for of our activities towards these more profitable products.

Everything you do is not equal in terms of profitability and some things are wildly more profitable. You need to find them and focus upon them.

Scale up

The 80:20 rule shows us that big clients tend to be less profitable. This is because we give them discounts, usually because they demand them and we can’t say no. They increase complexity by asking for stuff that’s not on our shelves and they often keep our staff busy running around for them. This erodes profitability.

Clients further down the scale are much more profitable and this is the sweet spot. When we craft a strategy for finding more of these types of customers, we should dramatically increase our profits without radically increasing the turnover or the costs, expenses and stress that come along with that.

The focus on doubling just these clients should double your profits without your business growing dramatically.

Marketing

The rule also has some really powerful ideas for marketing and gaining new clients, ideas that are more accurate, predictable and profitable than standard marketing approaches.

These include efforts like setting up strategic alliances or positioning yourself as an expert through public relations. The key though is that if you’ve worked through the three steps, you are guaranteed that each new client will become super profitable and so the desperation for constantly marketing falls away.

Most businesses do this completely the wrong way around. They consider the marketing as a first step, bringing on ever bigger and bigger clients, giving away discounts and terms to land these and then trying to make money out of these. This is a struggle and will cause eventual failure for many promising small and medium businesses.

A working solution

These are just a few of the lessons from the 80:20 rule that you can apply right away, but understand that the concept is ever present, affecting every part of your business.

To really appreciate this, you need to consider that nothing is average, don’t treat all your clients, staff, products, opportunities or threats with the same respect, most simply don’t deserve your time.


 

Advertisement

LEAVE A REPLY

Please enter your comment!
Please enter your name here

For security, use of Google's reCAPTCHA service is required which is subject to the Google Privacy Policy and Terms of Use.

I agree to these terms.