There are a lot of generalities when it comes to different aspects of business management. The 80/20 rule can certainly be considered one of those generalities. The basic logic behind the 80/20 rule states that 80% of the final result is created by 20% of the action. This article looks at this often overlooked principle of business management and how it can be applied to inventory, revenue and customer relations.
History of the 80/20 Rule
An Italian economist by the name of Vilfredo Pareto is given credit for first conceiving the 80/20 rule. In fact it’s some times know as the Pareto Principle. In the early 20th century, Pareto first observed that 20% of the Italian population owned 80% of the property in Italy. Besides business economics, the Pareto Principle has been used for many different applications.
Inventory Control Management and the 80/20 Rule
Proper inventory control is an important aspect of business profitability. Having the correct inventory means more revenue. Having the incorrect inventory on hand will decrease revenue and reduce cash flow. Applying the Pareto Principle to inventory control states that
- 20% of the inventory accounts for 80% of the sales
Naturally in the reverse order, 80% of the inventory only accounts for 20% of the sales. Applying the rule to inventory control means that a company should have ample supply of inventory for those products that generate the majority of the revenue. On the flip side, the majority of the inventory (that generates 20% revenue) should be closely monitored to keep idle inventory to a minimum.
Marketing Strategies and the 80/20 Rule
Understanding the company’s target market is an important marketing tool for revenue generation. Being able to pinpoint and concentrate marketing efforts can have a major affect on profitability. First, being able to focus marketing efforts will help to increase sales. Secondly it can reduce expenses associated with advertising and promotions because of marketing efficiencies. Here’s the basic rule for marketing strategies.
- 20% of the customers generate 80% of the sales
Customer Retention and the 80/20 Rule
Customer retention is probably the single biggest factor for company profitability. Naturally the catalyst for customer retention is customer satisfaction. So where should the majority of a manager’s efforts be concentrated according to the Pareto Principle? Applying the 80/20 rule to targeting satisfaction issues states that
- 20% of the customers account for 80% of the problems
The Pareto Principle, as it applies to business management strategies, is a reminder that there are two sides to every coin. When it comes to inventory control, it’s important to look at what’s actually driving sales. Looking at marketing strategies, the focus should be on the majority of the target market. With customer retention, the other side of the coin is that a small majority of customers is the largest majority of a manager’s headaches.