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The 80-20 Business rule


#1

I read another reference to the 80/20 rule today (80% of your volume
comes from 20% of your customers) and the point of the article was we
should quit servicing the other 20%.

That might be fine if you have an endless supply of potential 80%ers
waiting in line out there. Suppose you did give the 20’s the old
heave ho and you find all you did was lose volume and you’re drumming
your fingertips on the benchtop for two hours a day? Wouldn’t you
like a 25% increase in volume, just by once again servicing the
customers you gave the bum’s rush to? Can you get them back?

And what portion of those 20ers could be converted to your 80’s
list?.. given some time and cultivation. I think, no, I know its way
easier to upgrade a customer than to get someone entirely new to your
operation to buy big.

I don’t know, I’m wondering if this rule of thumb is maybe not as
cut and dried as it first appears.

Or am I missing something?


#2

Hi Neil

I read another reference to the 80/20 rule today (80% of your
volume comes from 20% of your customers) and the point of the
article was we should quit servicing the other 20%.

Do you remember that shampoo commercial? “and she’ll tell two
friends, and so on, and so on, and so on…”

The other 20% are still going to talk to all of their friends about
the quality of service they have received. If the 20%'ers continue to
be served well, they will go and tell all their friends (possibly a
lot of 80%'ers)

A few months ago, I had to have my engagement ring evaluated for
insurance. When it was finished, I asked the jeweler if he could take
a look at my engagement band. After 12 years of wear, I thought the
white gold portion of the ring might be separating from the yellow
gold portion. He took a look and confirmed this. “No problem”, he
said. He took it to his workstation (immediately) and came back 5
minutes later. It was perfect again. Then he said “have a great
day”…I said “Oh, I think you forgot to charge me”…Didn’t you
buy your ring here? Well, yeah, but 12 years ago. “No problem, if
you bought it here, we fix it for life” The thing is, my husband and
I are not big consumers. He has bought a bracelet, a pair of
earrings, and my engagement/wedding set there, in 12 years. Yet I get
this kind of service. I tell everyone I can “I got my ring from
Valentine’s Jewelers in Milford, Ct, they’re great”.

Kim Starbard
Unique Jewelry Designs
http://www.kstardesigns.com


#3

Neil,

You and I must read the same magazines, because I think I just read
the same article. But isn’t it that we should dump the 80% who don’t
make up most of our business? It’s been said before and while in
some ways it’s true (I have a whole lot of customers who come in once
and buy wedding bands and never see them again except for occasional
cleanings and a much smaller group who buy from me three to four
times a year). But frankly, I think all customers bring in money so
they should all be serviced. Besides as you say, they already know
who you are, so there is some hope that later on they’ll come back
to you. Or perhaps more importantly, they’ll refer someone to you who
will become one of those big ones. I think it’s a great theory if
you’re really big, but for most of us small potatoes we have to take
whatever we can get. Which is not to say that I haven’t, over the
years, occasionally told customers that I could no longer help them,
when their demands became too extreme.

Daniel R. Spirer, G.G.
Daniel R. Spirer Jewelers, LLC
1780 Massachusetts Ave.
Cambridge, MA 02140
www.spirerjewelers.com


#4

I thought the 80-20 rule meant that you get 80% of your sales from
20% of your merchandise, and that it would be wise to focus on and
expand that which brings in the most profit, and weed out some of the
dead weight.

I’ve never heard it used in relation to customer base.


#5

I have to agree with Neil-

The 20/80 rule is good in theory and works on paper- However- I’ve
been tested by many a customer with a really dumb little job only to
be rewarded later- usually within the year- with a great custom job.
I think a lot of people out there know through some bad experiences
to try out the jeweler 1st with a small repair before giving them a 6
or 7k piece to make for them. Kind of makes sense. I try to be
optimistic about low end jobs and treat them with all the respect a
high end commission gets. It doesn’t always pan out- but when it
does…

Rona Fisher
ronafisher.com


#6
I thought the 80-20 rule meant that you get 80% of your sales from
20% of your merchandise, and that it would be wise to focus on and
expand that which brings in the most profit, and weed out some of
the dead weight. 

Yes it does, but of late it’s been applied to the customer base as
well.

Daniel R. Spirer, G.G.
www.spirerjewelers.com


#7

I learned the 80-20 rule as: we spend 80% of our time making 20% of
our money and 20% of our time making 80% of our money.

Richard Hart


#8

Henry Ford was supposed to have said that 50% of his advertising
budget was wasted, trouble was he didint know which 50%.

A first time customer may never come back, I have had hundreds of
those but I also have customers who buy every month and one recently
who placed a small order and followed it up with 2 orders in a week
that was worth about a months worth of everyone else. It is probably
about a correct ratio but ditch the majority? I dont think so.

Nick


#9

My husband was a sales trainer and statistical quality manager for
sales during the last 10 years of his career. He noticed the 80/20
note and has the following to contribute. "It’s interesting to see
how many things can be subject to the 80/20 rule. Baseball - 80 hits
will be achieved by 20 of the players for example. But it never
produces any meaningful data. The “rule” is not to be used for
account analysis or for real analysis of any kind. When applied
correctly, it may show where to start but it is more of a topic of
conversation than a “rule.”

I found pareto charts much more meaningful. Two or three charts work
best. On the first chart have the left or vertical axis be $$$ sold.
On the horizontal axis chart you’re customers in order left to right
or largest, next largest and so on to the right. You’ll end up with a
number of bars plotted in descending order. Next make another chart
for items sold. If you’re really sure of your margins, you can do the
same thing for profit. Now you have three charts each with the data
for three differing categories. Do they match up? Are any of the same
customers on all lists? What if the customer that buys the most items
doesn’t appear on the other two charts? What do you do if there is a
customer who buys enough to appear on the margin chart but on not of
the other two? To which customers should you cater? But these three
charts will work only if you know your customers, which is not easy
to do in retail.

Perhaps more meaningful to retail would be to analyze the products
you’re selling rather than the customer. Do 80% of your sales come
from 20% of your products? Gives you a start but what you need to
know, I think, is the 20% of the products for which there are very
limited sales. For example, the first chart could chart the number of
items on the vertical axis, the items on the horizontal axis. The
second chart would have margin on the vertical line, the items on the
horizontal. Do the most profitable items appear on the chart that
shows the volume per item? Should they?

Don’t use the 80/20 “rule” to make any decisions. Use is as a tool
to point you in a direction to help start the investigation.


#10

Working in the computer industry years ago, looking after small
office networks, it seemed that for us, 80% of our profits came from
20% of our clients.

80% of our problems came from another 20% of our clients. not
usually the same 20% either :-). arguments over pricing, unrealistic
expectations of Rolls Royce performance from equipment on a Morris
Minor budget.all of which cut into our ability to look after the good
20% and the average 60%.

The trick was to try and identify which 20% a new client would
belong to (and believe me, there were early indications) and, if
possible, shunt them off to another company so that we could look
after the good clients properly.

Jane Walker


#11
Then he said "have a great day"....I said "Oh, I think you forgot
to charge me"....Didn't you buy your ring here? Well, yeah, but 12
years ago. "No problem, if you bought it here, we fix it for life"
The thing is, my husband and I are not big consumers. He has bought
a bracelet, a pair of earrings, and my engagement/wedding set
there, in 12 years. Yet I get this kind of service. I tell everyone
I can "I got my ring from Valentine's Jewelers in Milford, Ct,
they're great". 

Thanks for mentioning this. I thought I was the only one. I’ve always
had the policy that I’ll repair for free anything that I’ve made in
the past, so long as the customer pays the shipping. (I don’t have a
retail shop.) And for exactly the reason you mention. I generally
sell something to at least one of my customers friends every time I
do a repair, and often sell to several. I do make sure to include
several of my cards with the return shipment to make spreading the
word easier.

Anybody else do this, or are lifetime warranties just that rare?

Lindsay Legler
Dreaming Dragon Designs


#12
Anybody else do this, or are lifetime warranties just that 

I’ve been offering lifetime warranties on all my jewelry for 30
years. That includes pretty much anything including gem loss warranty
(as long as they come in every six months for a cleaning), unlimited
free sizings and rehabs. But there aren’t many of us out there who do
that. Certainly not any of the big stores.

Daniel R. Spirer, G.G.
Daniel R. Spirer Jewelers, LLC
1780 Massachusetts Ave.
Cambrige, MA 02140
www.spirerjewelers.com


#13

Here ya go:

Nothin’s new under the sun…

In addition to the examples, I seem to remember that it applies
fairly accurately to traffic accidents…

http://www.donivanandmaggiora.com


#14
 I'm seeing it so often now that I'm beginning to think that it
has become some kind of catchword type of thing.... It must be the
new business mantra 

Lazy writers? Herd mentality? I dunno.

I wonder if sometimes the written word can seduce a reader into
giving up responsibility. Well, now that I think about it, yes, it
most definitely can. Your business is not like my business which is
not like his/her business which may not be like the trade
publications say it is. Its far better to determine your own
problems(not easy, admittedly) and devise effective solutions. Maybe
that’s it…self evaluation can be painful so we look for canned
remedies?

It took bitter experience to learn that the only rule of thumb worth
anything is that rules of thumbs are sometimes worthless. Can you
picture a jeweler who’s all thumbs?

Gee, I suppose I sound all down on trade publications. I’m not really
though I do think business owners should be selective in what they
implement.


#15
I thought I was the only one. I've always had the policy that I'll
repair for free anything that I've made in the past, so long as the
customer pays the shipping. Anybody else do this, or are lifetime
warranties just that rare? 

That’s my policy, and it always has been. Everything I make, sell or
repair is 100% satisfaction guaranteed, whatever my customer wants
that to mean. I’ll even eat the postage, both ways, and then
apologize if I sense the need, and then send a Thank You card.
Applies to custom work as well. Even if the customer changes their
mind and decides a new Corvette suits their needs better than a new
ring (the result of a lawsuit my Dad lost in the early eighties
concerning a deposit on a custom job the customer backed out of - the
court will side with the consumer 99.9% of the time anyway, so why
fight it?).

I’ve heard that 80% of your problems come from 20% of your
customers. If you 86 the 20%ers, life will be sweet. Great advice
when things are rockin’ right? What about when things aren’t rockin’
and gas costs more than milk?

Times are tough. Customers are hard to come by these days and I’ll
do whatever I have to do to get and keep each and every one of them,
80 - 20 rule notwithstanding. I try to live by an adage of one of my
old bosses, “Do more unto the customer than the other guy is doing
unto them” which has become easier and easier as of late. Here’s a
little secret. Happy people tell their friends, their happy friends
tell other friends, and so it goes. Even the twenty percenters have
friends.

Don’t I ever get taken advantage of? Sure, once in a while. But the
payoff comes when someone comes in and says “I heard about you from
so and so. She’s a real pain in the ***. When I heard she was happy
with what you did for her, I figured you must be good. She gives
everybody a hard time! So here’s what I need…”

Funny thing. This just happened to me after writing this post. Five
minutes ago (ten minutes after closing), lady comes in and says
almost word for word about her mother-in-law (she was right too, I
remember her M-I-L. Yeesh!). She left a $150 stone resetting job,
free from where she got it, but they were going to send it out of
town, and she trusts us more, partly because of her M-I-L. Wishes she
found us before she got it (me too - nice stone). She’ll be back for
her next anniversary present. And she’s gonna send her Mom in. Mom
just LOVES jewelry! I just love 20%ers!

Dave


#16

The 80-20 rule is just a concept to try and make one aware of where
one puts most of their time and energy, and what effort produces what
result. Relax, inhale, breathe out slowly…now get back to beating
yourself up.

Richard Hart


#17

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
individual transactions.

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
trouble.

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.


#18

A friend and I were talking about how we recognize the 80/20 rule,
yet have not been able to profit from it in material terms. He said
that he prefers Sturgeons Law, particularly the second principle.

“Ninety percent of everything is crap”

I love that.
Mark


#19
Ninety percent of everything is crap 

I haven’t heard that as Sturgeon’s law - even Googled it and
Wikipedia shows it as that, too. I’d heard it as a quote from Oscar
Wilde…Not important…

http://www.donivanandmaggiora.com


#20
I read another reference to the 80/20 rule today (80% of your
volume comes from 20% of your customers) and the point of the
article was we should quit servicing the other 20%. 

That sentiment reminds me of a problem that’s often encountered in
publishing. An accountant will look at the accounts, and see that
the majority of their revenue comes from the best sellers. Then he
turns to the publisher and asks, “Why not print only the
bestsellers?”

The other 20% still make you a profit, right? Just not as much as
the 80%. To stop servicing them still means losing 20% of your
business.

Paul Anderson