Choosing Your Customers Using The Pareto Principle

by Joe Clark, Featured Contributor

TWENTY PERCENT of the clothes hanging in your closet you wear eighty percent of the time. Twenty percent of the movies released on a Friday generate eighty percent of the ticket revenue over the weekend. Twenty percent of the items on your daily to-do list create eighty percent of your effectiveness. Are you seeing the pattern? Twenty percent of your sales efforts drive eighty percent of your revenue. And, twenty percent of your customers create eighty percent of your profits. Wow!

The principle that I’m outlining above is called the Pareto Principle or you might know it as the 80/20 Rule. Essentially, this principle states that the minority of the inputs in a process or system generate the majority of the outputs. Many books have been written about this rule over the years and one of my favorites is the 80/20 Principle by Richard Koch. The author does an excellent job of outlining the core idea and then illustrating the practicality and usefulness. The book is written in a business context so it’s particularly relevant.

We have used this compelling principle with numerous executive clients over the years and the application that consistently has the most impact is when we prompt teams to consider the following questions:

1. Who are the twenty percent of your customers that create eighty percent of your profits?
2. What are the differentiating factors that motivate them to buy from you versus the competition?
3. Are those differentiating factors gaining in strength or are they getting weaker?

Oftentimes these questions do a good job of ‘kicking the hornet’s nest.’ This is not a bad thing. When executives come together, roll-up their sleeves, and explore these questions as a team it is almost always a positive exercise. Many times it’s an exercise that sparks rigorous conversation and debate, which leads to dramatically improved strategic focus and alignment.