Increase profits with the 80/20 rule • New Tricks
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Increase Profits with the 80-20 RuleNow listen up.

That’s how Perry Marshall starts his email newsletters. And boy, have I listened up!

His book, 80/20 Sales and Marketing: The Definitive Guide to Working Less and Making More, is such an eye-opening book. It’s filled with so many expansive ideas that when I page back to what I have underlined, it’s all underlined!

For years, management people have known about the 80/20 concept. Also known as the Pareto Principle, it was named after an Italian economist who in 1906 showed that 80 percent of his country’s wealth was owned by 20 percent of its citizens. In the late 1990s, Richard Koch reintroduced Pareto’s work with the bestselling The 80/20 Principle: The Secret to Achieving More with Less, which applied the principle to just about everything. So I’ve known for a long time that 80 percent of sales will come from 20 percent of the customers, 80 percent of the time we wear 20 percent of our clothes, and 80 percent of the wear on my carpets is found on 20 percent of them.

Then Marshall expanded the concept into fractals, pointing out if 20 percent of your customers account for 80 percent of sales, then 20 percent of those customers will account for 80 percent of those sales. He then goes on to show the mind-boggling implications this has for sales.

What does that mean for your business? First, look closer and see if 20 percent of your customers account for 80 percent of your profits. You might be more than surprised. A core group of customers might represent close to 100 percent of your profits.

Now think about all of the ways that 80/20 can apply to your business. For example, let’s say you’re an owner of a small native plant nursery. You decide to set up an online store, to make your hard-to-find native plants more widely available.

You keep prices down and charge extra for shipping. But getting live plants delivered fast and in good shape does not come cheap.

After being in business two months, you take a close look at the results. Your company is selling an average of 3.5 orders per day, and each sale averages $200. For every order placed, there are three abandoned carts—online sales that are not completed—which would bring in $50 each.

You’re curious. What happened to those sales? To find out, you email the shoppers who abandoned their carts. You offer a discount for completing the sale. Two months later, you have no bites, only one reply from a shopper who backed out of the order. The shipping cost, he said, was too high.

Four important points related to the 80/20 Principle

Several things are going on here, and the 80/20 view helps us sort out important takeaways.

  1. Gardeners who are ordering native plants online are looking for high quality, unusual plants that they can’t find near their homes. There will be a percentage of these gardeners who don’t mind spending money to get what they want. Others will be very cost conscious. Takeaway: 20 percent of the gardeners will provide 80 percent of your revenue, so focus on reaching them and increasing their numbers.
  2. Your plants are high quality and unusual varietals not widely available. Since your target customer is a gardener who wants these plants and isn’t making a decision based on price, you can charge more for them. For sake of simplicity, let’s say each of your plants are $13.50 each and the average cost of shipping each plant is $2.75 (which adds 20 percent to the cost of the plant). Why not make each plant $16.25, which covers the cost to you of shipping? If the 20 percent who make small orders and are shopping on price decide not to make a purchase, it’s better for you, because your company saves money by avoiding processing a lot of small orders. Takeaway:  The 20 percent of your shoppers who spend the least money usually cause the most problems which is more customer service which causes you to lose money.
  3. You can encourage your higher order customers to buy even more by offering them free shipping on orders over $100. In order to get the free shipping the mid-range customer will increase their spending to over $100.00 to get the free shipping. Takeaway: Reward your best customers, which moves others into the higher level of spending to get the best deal. Encourage and reward the top 20 percent, not the bottom 20 percent.
  4. By continuing to tweak your online marketing, you will have high dollar amount orders coming in from a consistent percentage of visitors and you can now spend time on increasing traffic to your site. Takeaway: Your revenue from the 20 percent of the highest revenue shoppers will increase at the same rate as your increasing website traffic. That’s the beauty of a high conversion rate.

Eye-opening, right? I encourage you to read Marshall’s book cover to cover and sign up for his various mailing lists. Expect me to write more on using this principle to target your most valuable customers and focus on keeping them happy, and getting more customers like them. When you do that, you stop spinning your wheels—and get more bang for your buck.

What ways do you see this 80/20 principle working for you? I want to hear your stories and thoughts.

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