Why using the 80/20 rule for your business will shock you
t Precision 1 Koncepts, owner Keith Burwell harnessed the power of the 80/20 rule as the nation emerged from the pandemic in 2021. This concept, also known as the Pareto Principle, asserts that 80% of a company’s sales come from just 20% of its customers.
“Our sales were climbing back to normal, but we stretched thin taking every job that came in. By focusing on our top 20% — our amazing repeat customers — the impact was immediate. We upsold them on other products in the first month and gained referrals for similar companies. We worked smarter, not harder, and our profits soared.”
- Keith Burwell, owner of Precision 1 Koncepts
Can the 80/20 rule boost your company’s profits? We answer your most burning questions on attracting high-value customers for maximum growth while saying goodbye to less profitable orders.
What’s the 80/20 rule, and why is it significant for my business?
The 80/20 rule is a universal principle that applies to all populations, including customers. “In this case, it states that 80% of the value comes from just the top 20%,” says Mark Coudray, founder and principal at CatalystPlan.com. “That means a relatively small number of customers give you the majority of your shop’s profitability.”
However, many people don’t realize that the 80/20 principle is fractal. “This means that you can take 80/20 of the top 20%, and you’ll find that 80% of the value of the top 20% comes from 20% of that 20%, or the top 4%,” Coudray explains. This pattern repeats itself, allowing you to identify and refine critical segments of your customer base that are most valuable to your business.
“Within the top 20%, you have the 16% or 15% contributing significantly. But in the 80% below, it only amounts to 20% of your revenue. People are busy dealing with these customers, but they often bring more headaches than value, shopping for price and causing frustration.”
- Mark Coudray, founder and principal at CatalystPlan.com
Coudray points out that when you strip away the “emotional baggage” of not wanting to turn away customers, you can see the 80/20 rule in action: 80% of the value from the lower 80% is actually in the top 20%. “By eliminating the bottom 5% of the lower portion, you’re recovering between 87% and 93% of your revenue and profitability from the top 75%,” he says.
When NGA Promotions conducted an 80/20 analysis on its book of business, it revealed which clients merited increased attention.
“This approach enabled us to steer clear of commodity shoppers focused solely on cost. Prioritizing our top 20% of clients yielded several benefits, including more free time and engagement with clients who value our service and quality rather than just price.”
- Shawn LaFave, president and chief branding consultant at NGA Promotions
How can I identify my top customers using an 80/20 rule analysis?
“With the 80/20 rule, you look at your company’s sales data to see what’s working and what isn’t,” says Marshall Atkinson, business consultant at Atkinson Consulting. “This information is crucial for identifying your best and worst customers, what they’re ordering, and how frequently. You’d be surprised how many businesses don’t know their numbers until they wait for the accountant to send Q1 reports. The key is using this data to take meaningful action.”
To conduct an 80/20 customer analysis, gather all your customer data from a system like QuickBooks. Sort this list so the customers who spend the most are at the top. You’ll usually find that the top 20% of your customers contribute 80% of your revenue. Analyze what these top customers are ordering, how much they order, and how often. Categorize them by type, such as restaurants or churches. This helps you identify which customer segments are the most profitable and where to focus your efforts to maximize results.
“Don’t spend a lot of time on customers who don’t move the needle, like the one customer who orders 20 shirts. Figure out your top 20% and the top categories you sell to. Find clues in the data to identify where you can put more effort and get better results.”
- Marshall Atkinson, owner of Atkinson Consulting and host of the Success Stories Podcast
“Quartiles” you say?
One example of how focusing on the top 20% of customers can benefit your company is through quartile analysis, which can dramatically improve business performance. By sorting your customer list from highest to lowest customer and dividing them into quartiles, you can identify your top customers and focus on growing those relationships.
“For example, I analyzed over 8,000 customers and $150 million worth of screen-printing and promotional products business. One company I studied was doing $5.8 million a year, and 99.04% of their business came from the top quartile. The remaining 0.96% was from the other 75% of customers, orders and overhead. By focusing on these top customers, businesses can increase their revenue and profitability.”
- Mark Coudray, founder and principal at CatalystPlan.com
Believe it or not, the lower 50% of customers are costing you time and money.
When you understand behavior migration within your business, you can apply an 80/20 analysis to each of the lower three quartiles. “You quickly realize that quartiles three and four, the lower 50% of your business, are costing you money,” Coudray says.
“Every time you do business with them, it’s like writing a check for $250 an hour. People are shocked when they see it’s based on margin, not gross sales. These smaller clients don’t usually grow into significant contributors — minnows remain minnows.” - Mark Coudray, founder and principal at CatalystPlan.com
Shocking results.
Most business owners can quickly identify their top customers, knowing that these clients significantly contribute to profitability. However, many are surprised by how little impact the bottom 20% or even the bottom 50% of their projects have on total sales.
“The first year I did an 80/20 study, I discovered that our bottom 50% of projects generated about the same sales as just one of our top 20% customers. We spent roughly the same amount of time on each project, regardless of its value. A single top customer, with only a handful of projects throughout the year, equaled the sales of half of our total projects.”
- Joe Ortinau, owner of Ortinau Art
What challenges might my business face when transitioning to an 80/20 model?
Transitioning to an 80/20 model requires a shift in your business strategy and mindset. However, potential drawbacks include alienating some customers and losing diversity in your customer base. “Let’s say a new customer comes in and doesn’t initially meet your criteria, but you’re unsure about their long-term potential,” Burwell says. “Sometimes, those could be the clients who eventually join your top 20%, so you have to decide whether to give them a chance or turn them away from the start.”
Coudray also points out that you shouldn’t neglect your lower-tier customers since they may still provide value to your company. “You should regularly review your customer data to ensure you’re still focusing on the right customers and adjusting your strategies,” he says.
“It’s like brake lights on the freeway. When they come on, you can decide whether to slow down, take another route, or wait for the blockage to clear. You’re looking ahead, not just living in the chaos of the day-to-day cycle. Instead of reacting to gaps in sales by taking whatever comes through the door, break this self-reinforcing negative cycle by making strategic decisions.”
- Mark Coudray, founder and principal at CatalystPlan.com
Adjusting your marketing plan.
You may face resistance from customers who don’t fall into the top 20%, so you may need to adjust your sales and marketing tactics.
“Our primary challenge was generating new content and communications tailored to the top 20% and expanding our network within each of those client businesses.”
- Shawn LaFave, president and chief branding consultant at NGA Promotions
Regarding sales and pricing changes, Burwell found that most of his current clients understood why he made rate changes. “They accepted it was the direction and business model we were changing to,” he says.
Free yourself to focus on the Big Fish.
Ortinau faced the challenge of dedicating his time to the top 20% of his customers’ projects without alienating other clients.
“Our solution is to implement systems for my team members to field requests for smaller projects so that I’m not investing my time in them.”
- Joe Ortinau, owner of Ortinau Art
“This also provides them with experience interacting with customers and learning the best ways to provide solutions. People learn best from making mistakes, and I prefer my team to gain experience on these lower-value projects before working with larger customers where more is at stake. It’s a win-win scenario where they gain experience and free up time for me.”
How can I smoothly transition to using the 80/20 rule?
To ensure a smooth transition to the 80/20 rule, analyze your customer data to identify your top customers. “From there, develop strategies for growing relationships with these top customers while also identifying new customers that fit the 80/20 profile,” Coudray says. “This requires a thorough customer data analysis and may involve some trial and error.”
Understanding the 80/20 rule identifies and develops your profitable customers. “This analysis prompts companies to ask, ‘Which customers are profitable for us? Who should we develop?’” Coudray says. He explains that the top 20%-25% of customers didn’t get there by chance, but even within this group, the lower 5% are still testing the waters and lack a strong know-like-trust factor.
According to Coudray, first-year customers have a 50%-90% churn rate, but those who stay for two years are worth four times more. Many businesses mistakenly believe they are growing because this value increase offsets the noise from tire-kicker customers shopping on price. “Numbers are your friend since they predict your future and change how you see your business,” Coudray says.
“Sort your customer list from highest to lowest and divide it into quartiles. For 200 customers, the top 25% is 50 customers. Examine these top 50 — what industries are they in? Schools, churches, events, brands, bands? Determine if they have growth potential.”
- Mark Coudray, founder and principal at CatalystPlan.com
He emphasizes that first-year customers might become four times more valuable the following year. CatalystPlan handles this background work, revealing insights that companies often miss. “I’ve seen businesses operating for 30 years realize, ‘Wow, I never thought of that, but it makes perfect sense,” Coudray says. “It’s often hiding in plain sight.
Try raising rates and/or minimums.
Establish clear guidelines for client interactions, like raising rates or setting minimum order requirements, to prioritize high-value customers and reduce time spent on less profitable work. This strategic approach allows shops to focus on more lucrative projects by adjusting rates or minimums. Ortinau’s shop’s sales have increased, but the number of projects his team has processed has remained the same.
“Consider raising your minimums or rates. For example, if your minimum is 24, why not increase it to 48 or 144? Crunch the numbers to determine the new price.”
- Marshall Atkinson, owner of Atkinson Consulting and host of the Success Stories Podcast
Getting started with the 80/20 rule
Implementing the 80/20 rule in your business practices can lead to long-term benefits such as increased revenue and profitability and improved customer relationships. After 20 years in the decorated apparel industry, Burwell wishes he had implemented the concept sooner. “The long-term benefits have been much higher profits, which means more money for employees and equipment and room to take on more profitable work,” he says. “The stress from the bottom 20% isn’t there now, which is priceless. While we still work on our bottom 20% today, we’re not losing profits like before.”
LaFave recommends hiring a consultant or engaging a mentor to become proficient in the 80/20 rule faster. “Continuous learning about business operations, if your resources allow, can greatly enhance your growth,” he says.
