Running a business requires you to optimise the allocation of your resources. You only have a certain amount of time, energy and money. In order to achieve your goals or outcomes you need to be certain that you are allocating your resources to the actions or tasks that will give you the best return.
Even the largest companies have to allocate their resources to achieve the best results for the business. They can’t allow the wasting of resources just because it is a nice thing to do.
As a business owner, it is extremely important for you to be making decisions on the most efficient allocation of your resources and this can only come by understanding the numbers of your business.
We don’t mean the financial numbers for your business (it is taken that you are on top of these already) but how efficient and effective you are in allocating your resources
One of the most insightful and powerful rules for business is the 80/20 principle. Once you fully understand how to apply this principle to your business then you can really drive your business to higher levels of success.
Most people understand that the 80/20 rule means that 80% of your sales will come from 20% of your customers or that 80% of your results come from 20% of your efforts.
But the real power of the 80/20 comes from understanding the 80/20 of your initial 80/20.
Let’s look at this a little deeper with 4 powerful drivers of your business:
Insight 1: Customer Sales
We will look at how to apply the 80/20 principle to your customer sales:
Let’s say you have
Customers = 100
Sales = $10,000
Ave Sale = $100
So here you have 100 customers who generate $10,000 in sales with an average sale of $100.
So
Applying the 80/20 principle says 20 of your customers are bringing you $8000 in sales. With an average sale of $400 (8,000/20).
This means that these top 20 customers are 4 times better than average.
Now let’s apply the 80/20 rule further:
Sales $8,000 x 80% = $6,400
Customers 20 x 20% = 4
Ave Sale 6400/4 = $1600
So the 80/20 of your 80/20 for your customer sales highlights that 64% of your total sales is being produced by only 4 customers.
And
They are 16x better than your average.
Now, where do you think you should be allocating your resources?
This gives you 2 points to work on:
- What other services or products can you provide these top customers to further strengthen your relationship and protect your business.
- What are the characteristics of these customers so you can look for other customers who have similar characteristics to target as part of your marketing campaigns?
See how powerful this is for you and your business and how you can really focus your sales and marketing efforts.
Imagine how efficient and effective your allocation of resources can now become.
There is nothing good about average.
When we look at this customer analysis your top 20% of customers spend 4X your average customer and your top 4% of customers spend 16X your average.
Where would you be allocating your attention and focus?
So look for customers who will spend more.
This is why you make every transaction valuable. Look to upsells, downsells, other products and services.
Your first step should now be to analyze your own customer base. My feeling is that you will find that if it is not exactly the 80/20 split then it will be very close.
A good place to start when reviewing your customer base is to use these 5 Power Disqualifiers:
- Do they have the money?
- Do they have a pressing problem?
- Do they buy into your USP?
- Do they have the ability to say YES?
- Do you fit their overall plans?
20% of your customers will spend 4X the money
1% of your customers will spend 50X the money
Now let’s look at this example from another angle:
Insight 2 - Salespeople
When you apply the 80/20 rule to your sales staff then 20% of your staff are bringing you 80% of your sales.
So using the numbers from above
Customers = 100
Sales = $10,000
Ave Sale = $100
Sales Staff = 10
So 2 salespeople are bringing in $8,000 worth of sales. (you may ask what are the other 8 doing?)
Thus 2 of your staff have sales of $4,000 and the other 8 only have $250.
So again your top-performing sales staff are 16X better than your average sales staff.
What would you do?
The first thing would be to analyze your top sales staff and discover what drives them and how they achieve their sales. What characteristics do they have?
Then take your learnings and put it into sales training and building a sales system that can be taught and implemented as part of your company’s procedures and policies.
Second, it may pay to have your top performers mentor your next level of sales staff that show potential. This will allow you to improve the performance of your team.
Unfortunately, there will be members of your sales team that will have to go. In all honesty, you probably know who these are already so make the changes today.
The use of drivers and characteristics of your top performers will give you the basics of what you need to look for when hiring new sales staff.
Now you need to apply this to your staff
Insight 3 - Products or Services
Let’s say you have 100 products that give you $10,000 of sales.
Let’s crunch the numbers:
Sales $10,000
Products100
Applying the 80/20 rules will show that 20 products are bringing in $8,000 of sales.
You should be reviewing your products and services to ensure you are focussing on the top performers and not allocating time and energy to poor performers.
Before you begin to cut stock or services think about the relationship between different products.
Think about using the attraction of your top performers to improve your whole business performance by having upsells and downsells.
You need to not only maximise the performance of all your products but think about maximising the performance of your business as a whole.
The fourth area to apply the 80/20 principle is to your marketing activities.
Insight 4 - Marketing Activities
Ads
Review your ads to see which ones are bringing you the most traffic.
You should always be testing, testing and testing.
Review your headlines and see which headlines are performing and discord those that are not.
If your headline was used in a classified ad would it make the phone ring?
Keywords
Review your keywords and see which ones are bringing you the most traffic.
As a business, you should have a key group of 50 keywords that you want to own. The keywords that target your ideal client.
All your content, advertising, marketing should be driven so that you own these keywords in your niche or market. You want to be appearing high on Google searches for these keywords.
Sales Funnels
Review your sales funnels and see which ones are bringing you the best results.
If you have a poor sales funnel and you want to fix it break it into pieces and fix the pieces. It is like the story of how do you eat an Elephant? One-piece at a time. The same applies to your business, fix it one piece at a time.
Small steps will lead to significant gains.
When you really start to drive your conversion rates and you see them improving then you can buy all the traffic.
You will know what works with your clients and prospects and you will have a well-oiled marketing machine. One that you can turn up and down as you like.
Using the 80/20 principle on these 4 areas will give you powerful insights into the running of your business. Really targeting your efforts on your key customers, sales staff, products and marketing areas will drive your business.
First, you have to crawl, then walk and then finally run. Do this with your business.
To build a high performing business you need to allocate your resources to those areas that give you the best return. Optimise your priorities.
Your time, energy and money are valuable, don’t waste them.
Business requires both thought and action.
You learn by doing but you need to think before you act.
By being clear on what your business is and who your ideal client is will allow you to build and develop your strategy.
Applying the 80/20 principle to your business will give you the blueprint on how, where and when to allocate your most valuable resources.
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Photo by Austin Distel on Unsplash