Posted by: johnocunningham | April 5, 2012

What The 80-20 Rule Really Means

Professional service marketers often counsel their clients to focus their business development efforts on the 20 percent of clients that produce 80 percent of their revenues (the “80-20 Rule”).

But just where did this rule come from and what does it really mean?

The professional service variant of the rule is derived from a principle originally born out of empirical studies on product sales. That rule states that “20 percent of your products will generate 80 percent of your income, and conversely 20 percent of your income will take up 80 percent of your resources.”

This rule is known in business as Pareto’s Principle because it is often mistakenly attributed to Vilfredo Pareto, a 19th century economist, engineer and philosopher. But Pareto did not actually study product sales. Instead, he studied economies and distributions of wealth, concluding that with great consistency 20 percent of the population of any given society generally holds and generates 80 percent of the wealth.

It was business scholar and quality management advocate Joseph Juran who discovered that a variant of Pareto’s Principle held true for individual businesses. Juran came up with a number of statistically based, quality control innovations during and after the World War II era, and he was a forerunner to the Total Quality Management movement pioneered by the late Dr. Edwards Deming. He also came up with empirical methods of quantifying the cost of producing or selling poor quality products with hype, a strategy often used to bootstrap the bottom 80 percent into higher sales. This strategy can produce high margins and profits in the short-term, but will destroy a brand in the long run.

However, Juran did not advise companies to ABANDON the bottom 80 percent of their clients, products or services, nor did he tell them to focus ALL of their energy on the top 20 percent of their clients, products or services. In fact, he pointed out that the 80 percent who produce less income can be vital, both as sources of new and current business.

In the product area, there is a classic business school illustration of the fallacy of focusing only on high-end, high margin products. If a shoe store, for example, studies its sales, it might find that 80 percent come from women’s sizes 5 to 8 in red, blue or tan. But if the store decided to sell only those shoes – to improve profitability –  it would soon discover that total foot traffic and sales would plummet, and ultimately the store would go out of business.

So next time you are counseling someone about the 80-20 Rule, remember that the top 20 percent of revenue generators deserve most but not all of your attention, and you can not skimp on quality for the bottom 80 percent !

Trivia Note: Joseph Juran was also the brother of Academy Award winning director Nathan Juran, who directed “How Green Was My Valley”

 

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Responses

  1. Thank you for this post!!!! There are so many “experts” touting this rule without understanding it’s origin or concept. The one thing that also seems to fall through the cracks from a sales perspective, is that the top 20% tend to be long in the tooth when it comes to the sales cycle.

    The top 20% make you profitable but the 80% pays the bills.

  2. Reblogged this on stallwoodconsulting.


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