14 Jan The 80/20 Rule and Client Retention
The 80 / 20 Rule & Client Retention
I wonder sometimes if the 80/20 rule must be one of the natural laws. I know that it was Vilfredo Pareto, an Italian economist, and not Newton or Galileo that came up with it, but it’s amazing how many things in life (and in business) conform to it.
As background, Pareto first noticed that 80% of the land in Italy was owned by 20% of the population. Shortly thereafter, he realized that 80% of the peas in his garden were produced from just 20% of the pods.
The parallels go on and on. The wealthiest 20% of the world’s population account for 80% of the GDP. In business, 80% of profits come from 20% of clients, 80% of complaints are from 20% of customers, 80% of sales are made by 20% of staff and on it goes.
We’ve already shown, again and again, in our “Lessons Learned” facilitations that 80% of losses, for most of our clients, can be explained by just a handful (usually about 20%) of the total of the defined reasons for loss.
Another unfortunate reality, that we have often observed, is that 80% of management’s time will typically be devoted to 20% of the clients, but that this time distribution is out of urgent and unwelcome necessity, not design. These 20% of clients demand this time and attention because they are “bad” clients – either performing below standard, constantly complaining or just plain troubled in some other way. The implications of this time skew are serious:
The top 20% of clients (where 80% of the profits are coming from) are neglected simply because they are running smoothly, but their profitability is not being optimized. Secondly, and even more dire, the attention deficit may put the contract at risk of loss to a competitor.
To the extent that management recognizes and acts to correct the imbalance, the business will prosper. Three key steps are required:
- Be willing to “fire” the clients who are the most egregious contributors to the deficit. (This is kind of like a knee replacement – you put it off as long as possible, them once you’ve done it you wonder why you didn’t do it sooner.)
2. Reallocate the resources to enhance and defend more suited and profitable business.
3. Commit to a disciplined process of only taking prospective clients who meet defined “Right Clients / Right Terms®” criteria to immediately begin closing the front door on nonaligned business.
Meaningful progress in bending and flattening the 80 / 20 rule can be an enormous contributor to productivity and profitability for most service organizations. How have you seen Pareto’s Law work in your business?