No, this is not a gruesome dinner recipe.
It is a guide (and a reminder) to an oft-forgotten approach to sales analysis: the 80-20 rule. 80% of the result is due to 20% of the underlying causes. The fancy name is the “Pareto Principle”, after an Italian scientist-about-town who formulated it in 1906!
So what % of your customers generate 80% of your sales? And so what?
Before you fire up Excel, we must caution that this type of analysis is a best fit for B2B companies that have repeatable, short sales cycles. For example, distribution of office supplies, food products, maintenance services, etc. For longer sale cycles (architecture design, ERP systems), take data from several years.
How?
Let’s review the mechanics of the analysis so we are all on the same page. Take the sales per customer for the last year, sort the totals in decreasing order and let’s assume that you get 100 rows (customers). For each row, calculate % of the total sales for the period. Now start going down the list until the sum of the % of sales hits 80%. What is the # of the customer? If it’s #18, it means that 18% (18/100) of your customers generated 80% of the sales during the last year.
What does this mean?
If you get a percentage that’s much lower than 20%, then your business depends on very few customers. This is not necessarily a problem, it could be specific to your industry or your geography. Maybe you designed your business to operate more efficiently by focusing on a few main customers.
If you get a percentage much higher than 20% then the bulk or your results come from a wider group. Some managers prefer this because it spreads the risk. But it also means that you have to pay attention to more relationships. The configuration of your resources is different.
What should you do as a result?
Take a long look for any surprises in the list. Did you overlook an important customer? Do you over-service to a minor one? Is the customer base distributed well among your sales team? Then, do the analysis again next month. The real value of the method is to track changes over time. Which customers are coming up in the leagues, which are dropping off?
80-20 is just one window on your sales. Some companies prefer to break our customer groups that generate respectively 80%, 15% and 5%. You could even try 50%, 30%, 15% and 5%. See which one makes more sense to you and your team. One caveat: it’s not a good idea to change the view often. The main point is to check the customer dynamics and consider whether your sales resources match them correspondingly.
The value of this analysis is to get out of the weeds and look at everyday work from a different perspective. Daily activity tends to blur business events into a numbing routine. To start, slice and dice your customers using the 80-20 analysis to take a look at the big picture. Then formulate actions and get back into the weeds.