The 80/20 Rule is Alive and Relevant
The 80/20 Rule is generally appropriate when examining two critical performance indicators 1) inventory - 80% of revenue comes from 20% of the product mix, and 2) sales - 20% of customers generate 80% of a firm’s revenues.
Another perspective to consider:
- 80% of the inventory is not productive, and
- 80% of the customers contribute minimally to the total sales effort
These numbers are not acceptable for high-performing businesses.
Recent news reports indicated that Ralph Lauren has made significant changes in their business, including store closings and returning to product mix basics. It was reported that 30% of their merchandise generated 70% of the sales revenue.
It’s natural to want all the customers we can get and to have products to meet all their needs. Unfortunately, there is a huge expense associated with these inefficiencies.
- Review sales histories to identify inventory that is performing and close-out the rest. Physical inventories are mounds of cash that lose value everyday they don’t sell, an expense which drags the company down.
- Determine the lifetime value of your customers. How much revenue will a loyal customer generate over a number of years? Rank your customers and focus efforts on the most valued.
- Evaluate the value of your remaining customers. Develop those with high-growth potential. Refer the rest to alternative resources.
- Focus on the indirect cost of sales. It costs just as much, or even more, to service a $25 sale when compared to a $2,500 order.