The 80/20 rule is a principle that can help you identify the areas that will drive customer loyalty and increase your revenue and profits. By prioritizing the 20% of factors that will produce the maximum value for your business, the 80/20 rule can help you focus on what matters.
What Is the 80/20 Rule?
The 80/20 rule, referred to as the Pareto Principle, is attributed to Italian engineer and economist Vilfredo Pareto at the beginning of the 20th century. The staying power of this long-held management consulting principle stems from the fact that the rule can help businesses determine which initiatives or critical tasks to prioritize to obtain optimal results.
So, what is the 80/20 rule exactly? The 80/20 rule maintains that for many events, 80% of effects (e.g., revenue, sales) come from 20% of causes (e.g., products, employees.) In other words, 80% of results come from 20% of the effort. For example, 80% of company profits can come from 20% of customers.
The 80/20 ratio occurs so frequently that it is a highly effective guide to help you focus on what's most important for your business. However, the 80/20 rule is not a scientific theory and doesn’t apply to every case. In some cases, the distribution ratio may be 75/25, for example. But the basic premise of the rule is true, that a small percentage of causes are responsible for a large percentage of results. It's essential to focus on the principle, rather than the actual numbers.
The 80/20 principle doesn’t imply that you should neglect the remaining 80%. The rule simply suggests that the remaining 80% may require less focus.
If your analysis suggests that 80% of sales come from 20% of customers, it makes sense to reallocate some of your marketing budget and most marketing initiatives to target the 20%.
How Does the 80/20 Rule Apply to Business?
The 80/20 principle applies to a variety of fields. Let’s look at a few frequently quoted examples.
Customer Satisfaction: 80% of complaints come from 20% of the customers.
Sales: 80% of sales are driven by 20% of sales staff.
Inventory: 80% of customers are interested in 20% of your products or services offered.
Quality Control: 80% of defects come from 20% of the possible causes.
Marketing: 80% of results from website traffic come from 20% of what’s listed on the site.
The applications of the 80/20 rule go on and on.
Use the 80/20 Rule to Drive Customer Loyalty
The 80/20 rule can help you boost sales and revenue by driving customer loyalty. Start by identifying which customers fall in the top 20% bracket. Take a deep dive into your finances to figure out where the majority of your revenue is coming from: Look for customers who are frequent buyers and those who are high-volume buyers. Those are the ones that likely generate 80% of your revenue.
Once you’ve identified the top 20% of your high-value customers, explore how you can allocate 80% of your effort and resources to activate those customers to spend more effectively. One of the most effective ways is to offer a creative loyalty/rewards program and focus most of your marketing efforts and relationship building with this group.
Consider these tips to help you do this:
Provide a Gift for Purchases Over a Certain Amount
We're all motivated by free giveaways. Leverage the 80/20 rule to target your advertising to the top 20% who make substantial purchases and offer them a gift when they spend over a certain amount. Should the gift be a surprise, or should you tell the customer upfront? Both approaches have merits, but don't underestimate the power of surprise in delighting your customers. Surprising them with an unexpected gift may motivate them to shop more and increases the likelihood that they will share their delight with those in their network. Since we trust recommendations from people in our circle, this can kickstart an exponential referral chain that drives more traffic and sales for your company.
Give Your Top 20% of Customers a Feeling of Exclusivity
Make your top 20% of customers feel like VIPs by offering exclusive sales, gifts, services, and access to special events as rewards. A 2020 study by Yotpo, an eCommerce marketing platform, revealed that over 50% of respondents cited “early access to sales” (60.1%) and “early access to new products” (50.8%) as two rewards they want from loyalty programs. The study included 2000 consumers between the ages of 14 and 73 across the U.S., UK and Canada.
You can also offer your top 20% a free VIP membership, allowing customers to work their way through VIP tiers with extra layers of exclusivity. You can provide unique benefits such as no questions asked returns, expedited shipping, and exclusive discounts and coupons.
Consider Charitable and Environmentally Supportive Rewards
Many people today are environmentally conscious and want to support good causes. Doing well by doing good is a strategy that can engender trust and loyalty to your business. By analyzing the characteristics of your top 20% of customers, you can discover what matters to them.
For example, some of your young customers in the top 20% may be particularly motivated to spend more by offering eco-friendly rewards custom-printed with your logo. This group usually is active on social media and is likely to recommend your company to friends and followers. You might even gently encourage them to post a photo with their gift.
You could consider adding a page on your website dedicated to a charity or cause that may appeal to your 20% of buyers and donate to a charity every time the customer shops.
Apply the Marketing 80/20 Rule
If your analysis suggests that 80% of sales come from 20% of customers, it makes sense to reallocate some of your marketing budget and most marketing initiatives to target the 20%.
Again, this doesn’t mean you should neglect the remaining 80%. You can continue allocating reasonable marketing resources for lead generation, for example, while putting 80% of your marketing effort on the crucial 20% of your customers. For example, send personalized advertising emails to attract their attention and encourage your salespeople and other staff to promote your rewards program at every touchpoint.
These repeat customers generally support a business and are likely to access a company’s social media platform, so you can habitually post special time-limited rewards such as flash sales or discount coupons to influence them to keep tabs on your business.
Embrace the 80/20 Rule to Reward and Retain Your Top Talent
The 80/20 rule maintains that 20% of employees are responsible for 80% of the work. Their engagement and hard work are integral to fostering positive customer experiences, either directly or indirectly, leading to greater customer loyalty.
Apply the 80/20 principle to aid in retaining these employees and encouraging them to continue contributing at these high levels. What can you do?
Determine Who Your Top 20% of Employees Are
Generally, everyone knows who the most productive people are in a team. They are the ones who go the extra mile, who consistently get superior results and can be relied upon to take care of things. Don't overlook those who quietly, in the background, also give you 110% effort but may go unnoticed.
Make the time to identify your most productive employees quantifiably. In sales, for example, look for those who regularly exceed their quota.
Give the Top Performing 20% of Employees More of Your Time
We often spend more time with the most high-maintenance employees—those who complain most loudly and often and those who make the most mistakes. The top 20% of high-maintenance employees steal your attention and use up a large portion of your time.
Use the 80/20 rule to reverse this practice. Spend more time with your top 20% of high performers and listen regularly. Conduct stay interviews to assess their job satisfaction so that you can make changes before it's too late.
Generously Reward the Superstars in Your Company
Go beyond competitive compensation and open the doors to a wide array of special rewards for your top talent. These can include:
- Revenue sharing
- A laid-out path for career advancement
- Removing barriers to achieving goals
- Flexibility in managing their work
- Generous continuing education opportunities
- Public recognition
- Hand-written notes of appreciation
- Lunch with the boss or other regular one-on-one events
Another way to reward your top performers is to keep them challenged by giving them stretch assignments and providing more responsibility to allow them to grow and earn more. Protect them from burnout by giving them ample time off when needed.
Facilitate Internal Mobility for the Top 20% of Your Key Players
Internal mobility programs offer your talented employees growth opportunities by allowing them to move both vertically and laterally within your organization. Building an internal mobility program is an essential strategy to retain your top 20% of talent.
Using the 80/20 rule to focus your efforts is a powerful tool to help you achieve your desired results. If you're undertaking ten things to manage your customers and employees, two will likely be significantly more crucial than others. Choose wisely by considering the 80/20 principle.
Photo: American Express
