The 80/20 principle, also known as the Pareto principle, has been an extremely useful means of focusing on what matters. General examples of this principle are:
“80% of wealth is owned by 20% of people”
“80% of traffic is on 20% of our roads in our city”
In business, this principle is also useful:
“80% of your profit comes from 20% of your sales”
“80% of your complaints come from 20% of your customers”
“80% of sales come from 20% of your clients”
No doubt you are nodding your head with these examples and could come up with much more besides.
Now there is another principle: 120/20 principle which implies 20% of your effort produces 120% of your results. The other 80% is actually a loss to you. In other words, the 20% subsidizes the remaining 80%.
Let’s take one of the examples above and rewrite it:
“120% of your profit comes from 20% of your sales” and every sale above the 20%, you start losing money. This loss may not just be an accounting loss which you may discover when complete cost allocation is made of all your business overheads. It can also include opportunity cost for time spent with low-value customers since:
“120% of your profit comes from 20% of your customers”
Which means that trying to make the sale and deliver the service for the other 80% is costing you money. That doesn’t mean you should drop the other 80%, but you certainly should take a hard look at what you are doing with them and see whether you can change your model.
Under the 80/20 rule, you may still continue with the other 80% of your customers, because you believe there will still be a profit contribution, but the 120/20 rule says the 80% are actually subtracting from your bottom line, not adding to it.
By Chapman
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