What the heck is the Pareto Principle and how does it apply to sales?

Posted in Sales techniques and processes.

The Pareto Principle may not sound familiar, but it is in fact a very valuable tool in the business world. In 1906 Vilfredo Pareto, an Italian economist, concluded that 80% of the land in Italy was owned by only 20% of the Italian population. This is why this principle is also sometimes referred to as the “80/20 Rule”. Pareto did surveys in various other countries and found the exact same to be true.

The Pareto Principle has been found to apply to many situations, including sales. For example, 80% of your sales come from only 20% of your customers. Or even, 20% of your sales staff makes 80% of the company’s overall sales. In essence, 20% of all input (effort, time and resources) account for 80% of all output (results and rewards).

How can something like the 80/20 Rule help your sales? If you can discover which customers fall into the 20% bracket that makes up 80% of your sales, you can aim your focus more acutely on these valuable customers. Also, you can hone in on the characteristics of the 20th percentile customers and then find other customers that share those characteristics, thus dramatically growing your business.

Recently there has been a new take on the Pareto Principle by an author named Perry Marshall. He has found the 80/20 Rule to be exponential. This discovery means you can zoom in even more closely on the types of customers you want and need.

We know already know that 20% of your customers make up 80% of your sales. However, there exists an 80/20 Rule within this 20% of customers as well. The top 20% of the top 20% (calculated as 4%) represent 64% (calculated by multiplying 80% with 80%) of your sales. Now you can look at that 4% group of customers and narrow down their shared characteristics. Then go look for more customers that are like them. This can be scaled to the third and even fourth power, especially when the numbers are large enough.

So, now that you know a bit more about the Pareto Principle, how can you put it to work? The easiest and most logical starting point would be your list of current/existing customers. Look at the following three factors:

*  Who bought the most recently?
*  Who bought the most frequently?
*  Who spent the most money?

As soon as you have answered these three questions, you have found your 20%.

Next you go geographical. You should know by now who your most prolific customers are and now you have to find out where they live. To make it as basic as possible, get a map that includes all of the areas where you have customers and then put thumbtacks on each customer’s work or living area. This simple method helps you to narrow your focus to areas that are more likely to bring in the most profit, and saves you money by eliminating potentially unfruitful areas from your advertising and marketing campaign.

Take notice of personality traits. Pinpoint customers who make the most expensive purchases. All of these people usually have similar characters and have certain things in common. Look at all demographic elements you can think of: age, gender, income, number of children, marital or relationship status, the kind of car they drive, where they holiday and so forth. Remain as open-minded as you can and broaden your viewpoint. Once you have found their commonalities, tailor your product or services to appeal specifically to them.

Adhering to the 80/20 Rule doesn’t mean you start neglecting the other 80% just because they don’t bring in enough sales. They are still important. That 20% simply allows for you to become more engaged, figure out your target market and hone in on the people who are truly interested in what you have to offer. Also, choose to consciously rid yourself of customers who cause problems such as wasting valuable phone time with salespeople or who change their mind numerous times without making a true commitment or ever sealing the deal.