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The 80/20 rule – AKA The Pareto Principle
The 80/20 rule – AKA The Pareto Principle

The 80/20 rule: What can it do for you?

The 80/20 rule stipulates that a small part of a business will be contributing a large portion of overall revenue. DAVID BROWN explains how to use this economic principle to get the best out of your business.

I’ve long been a big fan of the Pareto Principle, or 80/20 Rule as it is more commonly known.

The theory was developed by 19th-century economist Vilfredo Pareto, who claimed that 20 per cent of the inputs (or effort), provide 80 per cent of the outputs (or results).

Initially, Pareto used the 80/20 Rule to apply to land ownership, where he found 80 per cent of Italian land was owned by 20 per cent of landowners.

However, the theory has since been applied across other areas of life – 20 per cent of your clothes will be worn 80 per cent of the time; 20 per cent of criminals complete 80 per cent of the crimes.

It also applies in business, where 20 per cent of your resources can be shown to give 80 per cent of the benefits.

How does knowing this help? Retailers who are aware of the critical 20 per cent can easily leverage this knowledge to magnify their results.

There are three critical areas where the 80/20 Rule can be used to improve your business performance: maximising supplier relationships, maximising salesperson results and maximising the performance of your departments.

Super suppliers

Start by printing a supplier report by gross profit. This should list all your suppliers in order of their contribution to gross profit.

"Retailers who are aware of the critical 20 per cent can easily leverage this to magnify their results – there are three critical areas where the 80/20 rule can be used to improve your business performance."

If you’re like most stores, you will probably have three or four pages of product listings from your suppliers but the top seven to 10 of them will be providing you with 50 per cent 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 suppliers will potentially lift profits – if the product they provide is selling well then it is likely that you will benefit by selling more of that product.

Already, your customers like what these suppliers are providing so buying more will improve your store’s standing with customers and also improve your relationship with suppliers.

Also, replacing product from other suppliers with more product from these ones will reduce the time and effort involved in managing your inventory.

Stellar staff

Next, we’ll look at staff. Print your salesperson report in order of sales performance and it will likely show that 20 per cent of staff are providing 80 per cent of sales.

It stands to reason that creating more sales opportunities for the top 20 per cent of staff will lead to greater sales than giving those opportunities to the 80 per cent of staff who only contribute 20 per cent of total results.

Invest more of your time, effort and energy into developing these top salespeople and you will make the most of their sales opportunities.

Developing departments

Everyone wants to sell more diamonds but is that why customers shop with you?

Large department stores can have 40 to 50 departments but only five to eight of them provide the lion’s share of overall profit.

What are your best departments and are you giving them the resources they need to shine? Are you investing enough in these areas? Are you keeping product lines up to date?

Additionally, are you maximising profitability across these departments? Do you devote enough prime selling space to these departments so that consumers have easy access to their products?

I spoke to a jeweller recently who performed this exercise and was surprised to discover that pearls were one of his top-five departments.

He had done no staff training in this area, had minimal selection and had displayed the product in a dead area of his store. Once he provided his pearl department with the focus it needed, he recorded a 15 per cent increase in sales in just three months!

Print these three reports – suppliers, sales staff and product line performance – from your system and have a look.

What opportunities with suppliers, staff or product lines have you been neglecting? What areas are surprising?

Apply the Pareto Principle and start maximising your results immediately.

David Brown

Contributor • Retail Edge Consultants

David Brown is co-founder and business mentor with Retail Edge Consultants. Learn more:

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