When we compare one business against another it’s often done with a specific question in mind. The average Net Profit. Percentage of staff turnover. Number of hours worked by the Principal Owner. Data and facts are readily available in various forms or another for small to medium sized businesses. There are major suppliers such as the ATO’s Small Business Benchmark online app(1) and the more commonly used Benchmarking Data and Research(2). Using data for comparative reasons can support an already formulated points of view (looking for a supporting statistic), therefore rendering the whole benchmarking process redundant. It’s when a Business Leader is open to look at the numbers they may not like seeing that it’s worth the time and effort.
It’ll only make you stronger
It’s true that when asking for feedback the first response is often to express an opinion back to that person(3). Instead of thanking them for their feedback and leaving it at that, the knee-jerk reaction that so many of people do is to judge the advice. People know that not everything that is given in feedback will be acted on, but we still feel compelled to either block out good feedback or pick at the bits that we like the sound of.
Benchmarking is the same as asking for feedback. It’s a pool of information that other people have discovered and collated in a data set ready to be shared. Cherry-picking the areas to learn about (only listening to part of the feedback) may mean that the “tether” or pain point of a business is overlooked. Remember when receiving a benchmark report that it’s another form of feedback, so take the good, the bad and the ugly. Evaluate the whole picture opening up the data tunnel vision(4). The business may be below the industry benchmark across the board. The good news in is at least the business knows where it stands and it can now make clear decisions on the basis of that information. Benchmark results will not only make a business stronger it provides valuable information which could divert the business away from potential pitfalls.
Stay the best or pitch for better
Taking the Australian Benchmarking Data and Research sample report(5) as an example, it’s easy to see that a host of information on the competition versus the business can be overwhelming. There is a plethora of statistics: turnover figures, the percentage of that divvied out on rent, occupancy rates, vehicle operating costs, the average practice of chargeable hours of labour, the number of days monies are owed on debtors reports, the number of projects which are yet to be completed.
When reviewing an industry benchmark report it’s advisable to begin formulating a strategy for each of the major areas where the business is underperforming. It turns out that more funds are required in marketing campaigns because competitors are currently more active. Or perhaps it’s time to hold a regular debtors meeting every 30/60/90 days to increase the flow of cash. There may be staff members requesting fair pay and the business may be required to place staff on enterprise bargaining contracts to ensure hourly rates are standardised and on par with current pay rates.
Some of the decisions may be difficult to make after reading through an industry benchmark. For example the unpleasant task of reducing the labour force in one area, for example administration, and boosting it in another area of profitability such as recruiting more sales/account service staff. The business may have exceeded the average operating costs which is draining on overall profitability. One strategy may be to call on the internal leadership team to provide all the relevant details to make better decisions on how the business can run leaner.
Reliable data is non-judgemental and an excellent tool to guide a Business Leader into identifying problems and points of weaknesses. It also can identify when a business is hitting it out of the ball park and exceeding positively (low overheads, now turnover of staff, short debtors etc).
Without a comprehensive gauge on the industry’s landscape Business Leader’s are left with disparate anecdotal information and hunches to make their decisions. Finding ways to improve, grow and steer a business using benchmarking was never meant to be easy, smooth or even fun. It’s a necessary, productive Leadership tool.
(3) Goldsmith M. (2007) What Got You Here Won’t Get You There. Hyperion. New York, America. (pp 117-118).
Now we know the 80/20 rule is occurring in many parts of our lives, how can we best use it to our best advantage in business? A prime area of business is customer and client management.
Remember when we said that 80% of sales comes from 20% of customers? We can use this to begin categorising our customers with “top” customers being the top 20% of revenue. What’s left is the rest of our client base where we need to find different levels of customer types to work with and cultivate.
A robust clustering tool is the A-B-C-D Client Model. First look at your business and put together a list of what your ideal client looks like. Once you have that list then you can cross reference it against the clients in your database.
Here’s how to categorise your clients once you have your ideal client list in hand:
A - Amazing Client. These are the people who you love working with and get you up in the morning. They pay well, refer you onto other clients, who bring you more business. These clients really like what you deliver, and they come back to you repeatedly becoming a “raving fan” of your business! Your team provides them with excellent service - that “plus one”1 - giving them extra effort because they are worth it.
B - is for B Grade Client. Not quite a raving fan, but still provides as a significant contribution to your business. Second place, in this case, is a good thing. It means you may be on the verge of making this client into an A-Grade client. Your team gives your B Grade clients a fairly good amount of attention. These clients are happy with your service and they represent a healthy volume of sales.
C - Cut or Cure Client. This client is at a crossroads. You question whether you should I cut them loose or cultivate them over time. A Cut or Cure Client could go either way. They could be a client that you could work on in small doses, over time, and monitor to see if there is any increase in sales. They could move up a level or two which is terrific. Or, on the other hand, you may find yourself in the difficult position of moving them down to cutting them loose, to D Client because they just ain’t making the grade.
D - Delisted Client. Harsh but necessary category. Delisting a client could mean that you have tried to work with them but it’s just not working out. They could come from the “C” group above. D Clients are ones where you part ways. How do you know when to cut the cord with a D Client? Easy. They aren’t paying on time, or in some cases not paying at all. They have many complaints that are often unsubstantiated. They are a vortex of time and are a massive drain on your resources. Better hand them over to your competitors and have them deplete their resources so you can concentrate on your A-B-C clients.
When you examine your client list and the number of A’s B’s C’s and D’s you have, you may find you have a small number of A’s, so look at your business as a whole, and find out why that is happening. The aim is to develop as many A’s as you can. Do you have a small number of A’s because you are servicing D’s or are focussing on keeping your C’s? Have you given your C’s and B’s enough reason to refer you onto others (so they can shift up to A’s)?
With a clear understanding of how much value each client gives your business, your sales team can work with those viable groups to up-sell, cross-sell and diversify products and services across the A’s and the B’s. And on a smaller sales effort can be logically placed on curing or cultivating those C’s who have the potential to develop into a long term partner. Dividing the amount of sales management time spent on the clients makes financial sense. It ensures you are avoiding those clients who aren’t helpful and reinforcing those A-B, and possibly some cured -C, clients who are proven to provide your business with long term stability.
1 Blanchard K. and Bowles S, A revolutionary approach to customer service: raving fans! 1998 Clays Ltd St Ives PLC. Great Britain (pp 101-102)
We’ve heard it many times over. 80 percent of business comes from 20 percent of customers. Where did it come from? The short answer is Italy. It’s not just the land of vespas, pizzerias and jeans (coincidentally these were also invented in Italy). It originated from Vilfredo Pareto back in 1896 when he wrote his paper “Cours d'économie politique” or “Causes behind the Political Economy”. When developing his paper he drew from his observations that 20% of pea pods produced 80% of peas and he noticed this occurring in other areas of life and people. He observed that over 80% of wealth owned in Milan was held by 20% of its citizens1.
This recurring theme of 80/20 then came to the attention of management consultant Joseph M. Juran who, the 1940s, coined the phrase “Pareto Principle” and recognised that, from Vilfredo, there were the “vital few and the trivial many”2. The general rule of thumb of 80/20 was then applied to business, life, and just about everything else in between.
How does the 80/20 rule apply?
The rule occurs when 80% of an entity or happening is governed by 20% of another. That’s pretty much it in a nutshell. To put it into perspective, let’s look at some examples that we know happen our business lives everyday.
Customer complaints. They often originate from a small section of sometimes persistent customers. That means the majority of complaints are likely to come from a minority of our total customer base3. If we tallied up how many complaints versus how many customers we have, it may come to no surprise that the ratio roughly falls inside 80:20.
The same applies to repeat customers. They account for a high level of income to a business. However they don’t make up the majority of customer transactions. It’s therefore highly plausible that about 20% of a customer base will produce 80% of sales4. This rule can be used across many parts of a business, as author Perry Marshall explains in his book 80/20 Sales and Marketing5. He suggests business leaders to concentrate their efforts on those high value 20% repeat customers. Makes sense. And dollars.
Does it apply to sport? Absolutely. With athletes already in the same range of peak physical fitness 80% of the game (vast majority) shifts to being a mental game6. A large amount of time is spent on practising many strategies needed to win a game. Along with a high level of determination, focus and “never quit” attitude it places elite teams at the top of the NBA ladder. The rest of the time, a these teams spend keeping in peak physical condition and capitalising on natural physical ability (20%).
Making the most out Pareto’s Principle
In other applications of business, such as “ABCD Clients”, we will use the knowledge of the 80/20 rule to focus on the areas of business that matter the most. Harnessing Vilfredo Pareto's principle of identifying where energy is spent and applying it a business effectively, paves the way for a bigger and better future.
Imagine having more revenue from high value customers? How about knowing how to handle “problem” staff where they aren’t taking up a huge amount of your time? The 80/20 rule can help you identify the areas of who, what and where the greatest contributions to your business sit.
And that’s what’s really at the heart of the Pareto Principle - identifying value in people, time, money and effort.