I’ve long been a big fan of the 80/20 or Pareto Principle - the theory developed by 19th century economist Vilfredo Pareto that demonstrated 20% of the inputs provide 80% of the outputs or results. Initially he used it to apply to land ownership where he found 80% of Italian land was owned by 20% of landowners.
The theory has since been applied across other areas of life - 20% of your clothes will be worn 80% of the time; 20% of criminals complete 80% of the crimes. It also applies in business, where 20% of your resources can be shown to give you 80% of the benefits your business enjoys.
So how does knowing this help? If you are aware of the critical 20% it enables you to use and leverage this better to magnify your results. For example if 20% of your time provides you with 80% of your benefits then doubling your time spent in this area should double the benefits you receive.
So, how specifically can this be used in your business? There are three critical areas where the 80/20 rule can be used to improve your business performance: maximizing vendor relationships; maximizing salesperson results and maximizing the performance of your departments.
Let’s begin with vendors. Start by printing out a vendor report by gross profit - this should list all your vendors in order of their contribution to gross profit. If you’re like most stores you will probably have 3 or 4 pages of listings for product from your vendors - but the top 7-10 of them will be providing you with 50% or more of your gross profit. Applying the 80/20 rule it would stand to reason that building a closer relationship with this handful of vendors will potentially lift your profit. If the product they provide you with is selling well then it is more likely that you will benefit by selling more of their product. Your customers like what they give you; buying more from them will improve your relationship and the benefits that can provide; and replacing product from other vendors with more product from these one’s will reduce the time and effort involved in managing your product.
Next we’ll look at staff. Again a printout of your salesperson report in order of sales performance will show you that 20% of your staff will be providing 80% of your sales. Again it stands to reason that creating more sales opportunities for the top 20% of staff will lead to greater sales than giving those opportunities to the 80% of staff who only give you 20% of your results. You need to invest more time, effort and energy into developing your top salespeople to make the most of the opportunities that they can convert.
Lastly look at departments. Everyone wants to sell more diamonds - but is that where your customer perceives your strengths? Most stores will have 40-50 departments but only 5-8 of them will again be providing you with 50% of your profit. What are these departments and are you giving them the opportunity to shine? Are you investing enough in these areas? Are you focusing on keeping the product lines up to date with them? Are you maximizing the profitability across these departments? Do you devote enough prime selling space to these departments?
I spoke to a jeweler recently who did this exercise and was surprised to discover that pearls were one of his top 5 selling departments. He had done no staff training in this area, had minimal selection and had been leaving the product in a dead area of their store. An update across all three areas has already seen a 15% increase in sales in just 3 months since providing his pearl department with the focus it needed.
Print these 3 reports from your system and have a look. What areas are a surprise? What opportunities with vendors, staff or product lines have you been neglecting?