Fine in principle. What about practice?
Have you heard of the Pareto Principle (also called the 80-20 rule)?
It says that for many things, 80% of the results come from 20% of the causes.
In business, this means 80% of your revenue comes from 20% of your clients.
I’ve found this principle extremely useful.
But does it work for you?
I run a spreadsheet that tracks all my business metrics.
So far this year, 80% of my revenue has come from 29% of my clients.
The last two years it was 36% and 30%.
I’m a bit off the pace, but this is because I’ve vigorously reduced risk by increasing and diversifying my client portfolio.
You may recall I lost one client worth 82% of my business and took two years to recover.
Talk about all your eggs in one basket!
I won’t do that again.
For years I encountered the Pareto Principle in almost every business book I read. But because it sounded technical, I resisted analysing my customers.
This was so dumb. Once I bit the bullet, it took all of ten minutes to collate the figures.
And jolly useful figures they’ve been, too.
When my top client annoys me, I check my spreadsheet.
If a retort imperils 28% of my income, I bite my tongue (and do something really nice for the client).
If, on the other hand, a 0.1% client is demanding freebies, refusing to do proper briefs and complaining about my work, I know I can ‘retire’ them with relative impunity. (And live a longer, happier life.)
Cents of Perspective
This year, my biggest client has spent almost 200 times more than my smallest.
I prize all client relationships. But next time I have conflicting deadlines, who do you think I’m going to squeeze in first?
Insights like this make the Pareto Principle a wonderful commercial ‘compass’.
The fact I was slow to embrace it makes me wonder if you’re tracking this vital stat.
If you are, I’d love to know how you use it and what you reckon.
If not, here’s a quick recipe for success:
- List your clients vertically.
- Add up what they’ve paid this year and put each client’s total next to it.
- Sort clients in descending order of value.
- Calculate total revenue for all clients.
- Express each client’s contribution as a percentage of this total.
- Working down, see how many clients it takes to account for 80% of your revenue. (A cumulative column makes this a snap, if you know how to spreadsheet.)
- Divide this figure by your number of clients.
- Bingo! You now know what percentage of your clients generates 80% of your loot.
How did you go?
Is it close to 20%?
Do please let us know.
That way, we can all see if we’re rank amateurs
or principled performers.
Paul Hassing, Founder & Senior Writer, The Feisty Empire