80/20 Principle or Bust
During my last employment position, I was given the ultimatum to get on this train or get off. For those of you who are unaware of the 80/20 principle and how companies use it, you have a lot to learn. This principle effects all of us in our daily lives and when applied to business can have a drastic affect on the companies performance and bottom line.
80/20 principle explores the axiom that 80% of sales are generated by 20% of the customers, or approximately that ratio; 70/30, 90/10 etc. When a company evaluates their revenue stream they determine that usually the "A" customers are the ones to focus on and the rest are treated differently. By focusing on the these "A" customers the company can generate more sales and grow the business. Each year the company tries to simplify itself by eliminating waste and poor selling products to B and C customers. Eventually loosing the B and C's.
Sounds like a great idea right? Well, it seems to work well in the beginning. What I found seems to happen is that things can be done with less people and the company has no choice but to begin to force some to leave. Profits do improve and I believe that this goal get established fairly quickly. However, cracks in the levy begin to occur when you don't have enough personel to cover the bases and you loose just one or two of the "A" accounts.
The trend can be self fulfilling and cycle down into the ground if care isn't taken. Its tough for the managers to say, well, 20% to 25% operating profits are good enough and lets grow the business now. What seemed to happen at the company I was at is that the employees became alienated and some important people left causing the business unit to take some severe hits.
I believe that the principle works, however, the caveat is that the manager should choose the optimum point for the business and maintain that profit level where the business can be grown without damage. Some companies are pround they practice this principle like ITW who posts it on their annual report and websites. There are those that do not, like Elementis Specialties who practices it but wont advertise it.
You can tell when you have been 80/20'd when you are a small customer and big business doesn't care about you. When they only care about the big customers and would rather you go away. I suggest the best approach for the consumer or small business when you are 80/20'd is to take your business somewhere else. Work with those companies that are really interested in helping those small customers that might become the next Apple or Microsoft.
If you would like to learn more about this secret of success, check out the book "The 80/20 Principle" by Richard Koch. By the way, I got off this train and got on another!
80/20 principle explores the axiom that 80% of sales are generated by 20% of the customers, or approximately that ratio; 70/30, 90/10 etc. When a company evaluates their revenue stream they determine that usually the "A" customers are the ones to focus on and the rest are treated differently. By focusing on the these "A" customers the company can generate more sales and grow the business. Each year the company tries to simplify itself by eliminating waste and poor selling products to B and C customers. Eventually loosing the B and C's.
Sounds like a great idea right? Well, it seems to work well in the beginning. What I found seems to happen is that things can be done with less people and the company has no choice but to begin to force some to leave. Profits do improve and I believe that this goal get established fairly quickly. However, cracks in the levy begin to occur when you don't have enough personel to cover the bases and you loose just one or two of the "A" accounts.
The trend can be self fulfilling and cycle down into the ground if care isn't taken. Its tough for the managers to say, well, 20% to 25% operating profits are good enough and lets grow the business now. What seemed to happen at the company I was at is that the employees became alienated and some important people left causing the business unit to take some severe hits.
I believe that the principle works, however, the caveat is that the manager should choose the optimum point for the business and maintain that profit level where the business can be grown without damage. Some companies are pround they practice this principle like ITW who posts it on their annual report and websites. There are those that do not, like Elementis Specialties who practices it but wont advertise it.
You can tell when you have been 80/20'd when you are a small customer and big business doesn't care about you. When they only care about the big customers and would rather you go away. I suggest the best approach for the consumer or small business when you are 80/20'd is to take your business somewhere else. Work with those companies that are really interested in helping those small customers that might become the next Apple or Microsoft.
If you would like to learn more about this secret of success, check out the book "The 80/20 Principle" by Richard Koch. By the way, I got off this train and got on another!
posted by Jules Hermele @ 9:12 PM
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