80/20 Rule: The Daily Definition

 In The Daily Definition

What is the 80/20 rule?

80/20 rule daily def

The 80/20 rule, or the law of vital few, declares that for any action, 80% of the effects originate from 20% of the causes.

We often refer to this as the Pareto Principle. This principle tells us that we should be very purposeful in making business decisions, as one action can have a significant influence on the overall health of the company. In the world of business, you can apply this to many different areas of operation. However, we most often use it in a sales context, which takes us to our example.

An example:

We often see the Pareto Principle rear its head when discussing sales and customer retention. Based on this philosophy, most people agree that 80% of your sales spawn from 20% of your customers. This may seem hard to believe, but it makes sense when you break it down.

Closing a new sale can be a great way to bring in money, but it also requires a lot of behind-the-scenes effort over an extended period of time. With an existing customer, the relationship already exists. They trust you and your product.

Let’s imagine this scenario from the customer’s perspective. They need a steady manufacturer of doll clothes, as they receive steady shipments that come in large varieties, regardless of season. For the sake of saving time, they don’t want to re-research the best place to source their material from. They want a lasting business relationship and a reliable source for their product.

So, rather than shopping around, they chose to consistently reorder with you, the ideal company. This long-lasting relationship will end up being far more profitable than a bunch of one-off sales.

Our two cents:

With this principle in mind, it’s clear that a well-rounded customer service strategy ties in directly to your profitability. If you’re going to rely on your existing customers for 80% of your sales, you should make sure that customer retention is treated as a priority.

We know that you value your customers, but it’s important that they feel that too. By having your customer’s entire sales history at your fingertips, you can demonstrate your understanding of their needs, which will only bode well for your company to customer relationship. For more on how to ensure success with your customer interactions, check out our blog on using your ERP solution to streamline your customer relationship management strategy. 

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