The New Year, the Pareto Principal, and the 3 F’s


The New Year is the perfect time to review your business and make adjustments accordingly – it’s a natural break-point, and you may find yourself with some downtime to begin to plan and implement these three steps.

The New Year is the perfect time to review your business and make adjustments accordingly - it's a natural break-point, and you may find yourself with some downtime to begin to plan and implement these three steps. And you're certainly familiar with Vilfredo Pareto's Principal, aka the 80/20 rule, which can be applied to so much in life. But the application that I value most is how it applies to our customers in 2 related rules - 1) that 80% of your revenue comes from 20% of your customers¹, and 2) that 80% of your problems and headaches come from a different 20% of your customers. Who are your worst customers? You know the type - notoriously late to pay, challenge every invoice line item, lots of price requests and quotes but few orders, the PITAs, the complainers, the DIYers who want you to teach them everything you know and the outside-of-business-hours, your-cell-phone callers. And you probably could name them from memory.

Financial Advisors (FAs) face this problem - as they grow their practice and expand into wealthier clients, many still carry the low-asset, high-need customers due to "Lottery Fear" - the fear that they'll fire one of those customers who then wins the lottery.

But if you accept Pareto's Principal as it applies to your customers, how can you make adjustments to take advantage of it? Just remember the 3 F's - Fire, Focus, Find.

Step 1: 'FIRE' - Release those customers who are the source of most of your problems but contribute little to your bottom line. Release them? Fire your worst customers. You won't be able to accomplish Steps 2 & 3 until you complete Step 1.

Step 2: 'FOCUS' - Take some of that new found time that you no longer spend on those time wasters and invest it in your top customers - giving some free time to your best customers is a better investment of your time than wasting it on the ones who will never appreciate it. Focus on your best customers in order to grow them. Invest in them.

Step 3: 'FIND' - Use the balance of your new-found time to find new customers who have the potential to become great customers.  Remember that bad business can be worse than no business - having no business gives you plenty of time to find good business, but bad business sucks up your valuable time, leaving you no time to find good business. Find new customers.

Do I practice this? Yes, my resolution for 2013 was to end my 20-year relationship with an aging, directionless, legacy On Premises Contact Manager that defined that market 25 years ago, but has not adapted to new trends and developments and technologies, resulting in declining revenue along with increasing problems - it became clear that it's lack of investment (no SaaS solution, frequent fire sales due to declining sales, depleted development staff, another change in ownership for 30¢ on the dollar) could not align with my change in direction (Mobile, Cloud & SaaS, private company with a long term vision demonstrated by focused execution).  I then researched and selected a modern, Cloud/SaaS, young, growing, exciting product by a company that is profitable, privately owned with no outside investment, run by a person with a vision.

And my resolution for 2014 is to use that product - Zoho CRM, to identify those customers who I want to move with me, as well as those who I must leave behind. How will I benefit? I will no longer spend my day as a repairman doing break-fix on an aging, increasingly broken legacy app - now I will spend my day helping my existing customers, finding new customers through new Drip Campaigns, and responding rapidly to leads and opportunities.

Use the New Year as a time to re-think, re-evaluate, and review your business. You'll be glad you did.

¹Ed Kless and Ron Baker, of the Verasage Institute, suggest a more radical rule - that 20% of our customers generate 225% of our revenue.  Could that mean that the other 80%  cost us revenue...?

One response to “The New Year, the Pareto Principal, and the 3 F’s”

  1. Kevin – an outstanding article. Over the past few years we’ve made it a practice to “hire” great customers and fire the rest. Aside from having less stress, we get the satisfaction of doing our best work.

    I’d encourage anyone who’s been in business for awhile to add a fourth “F” – fun. If we’re not having fun, why bother? Working at trying to please the 80% can be a soul-sucking experience. For those who aren’t sure which is which, here’s a quick test: Are you energized when you see a client’s number on caller ID, or do you have to resist the urge to flee? That can help weed ’em out. 😛

    Best wishes for a fantastic 2014!