I constructed a model to test this theory, based on a 'typical’
family sized jewelry store (because I know jewelry stores, I don’t
know other forms). Tweak it as you see fit for your own application
if you like.
Let’s assume the biz does $500,000 gross sales per year on 1500
If 80% of volume comes from 20% of customers then 300 transactions
garners $400,000 volume, making the average retail ticket $1333,
which is definitely in the keystone or maybe less range. (if some
part of that volume is very large sales, loose diamonds for example,
factor in a lower margin)
The remainder of volume is $100,000 from 1200 transactions averaging
$83, typically triple key or better.
So a gross profit of $200,000 comes from a narrow, small part of
your customer base… But you’ve got $66,000 gross profit from the
rest. If you totally cut out the 80% of customers who spend small,
figuring you will increase that $400,000 to make up for it…you would
have to increase that $400K by one third to get back that $66K. (400K
X.33 = 132K at keystone which yields the 66K gross profit). You’re
basically preferring keystone over the triplekey. Margin-wise your
80%-of-customers are more profitable. So are we considering pursuing
the less profitable portion?
The questions then become can you increase sales of higher priced
merchandise by 33%? Possible, yes. How much will promotion cost you
to get there? Are there enough willing higher end buyers in your
market to facilitate it? Depends, doesn’t it? The desired increase is
not automatic, it requires a solid plan implemented correctly.
I would agree that one should certainly well service your important
clients, goes without saying. I’m not an accountant but I am a real
world business owner. Working that 20% of customers to the exclusion
of the rest…in my mind… greatly increases your risk exposure in
the event of a market change that really hurts your core clientele.
I just had an energetic discussion with a manufacturer friend who
tells me that for him, he has seen a big change in the price points
that move. Low end is very good, very high end is very good too. The
middle has been hurt by economic circumstances(gas, food, credit
problems, etc). Previously the middle was good. Luckily he was
working all three tiers of price points, so when the midrange fell on
its face he had the other two areas to compensate. I would venture
that if he had put all his eggs in the middle basket he would be in
After taking my full measure of kicks to the teeth over the years I
can see the wisdom of diversification and risk management. Maybe I’ve
just gotten gun shy in my old age but the lesson impressed upon me is
that the most important step to success is to first avert failure. As
long as your business has adequate positive cash flow you can do
something, go somewhere. I don’t understand cutting out a dependable
portion of cash on the gamble that a narrower focus may be more
profitable. Why not do both?
BTW, that manufacturer friend…I started out with him finding me an
obscure dumb little citrine for $35. When he told me what I’ve spent
with him over the years since, I nearly fell over. Acorns to oaks. I
think that 80%-of-customers is more valuable than the rule suggests.
Its a ready made stash of acorns.
Well, that’s my long winded take on it. Might work for some, might
not for others. The thing is though that before one takes a trendy
generalization as gospel, its wise to really look at the
ramifications for your own, unique business. Theory and real life can
be two very different things.
Thank you very much if you made it to the end.