The first approach, 80/20 Analysis, examines the relationship between two sets of comparable data. For example, in a group of 100 coffee drinkers, ask all 100 how many cups they drank last week, and arrange the answers in descending order. Add up the number of cups consumed by the first 20 on the list. The untrained mind would never ask, what percentage of the total this figure represents?

Let’s say that 70 percent of the coffee was consumed by the top 20 on the list. Any unbalanced relationship is referred to as “80/20,” A brewer would train it’s pepole to focus its marketing on the 20 percent (20 of 100 surveyed) who account for 70 percent of sales, paying less attention to the 80 percent drinking just 30 percent of the product.

You cannot collect precise data for analysis in many situations. Train yourself and organization to use “80/20 Thinking.” Ask : “What 20 percent of activity is leading to 80 percent of the results we want?” Don’t assume you know the answer. Take time to think carefully and discover the “valuable minority.” Now train your company’s behavior to concentrate on that most important but small group.

Look at each of your company’s products or services to determine profitability and rank them in descending order. One company found that 30 percent of the products accounted for 67 percent of profits. Doubling sales of those products increased sales by only 20 percent but profits soared by 50 percent.

Properly trained people will be able to examine the profitability of your business by breaking it into competitive segments; parts of your business where you face different competitors compared to other parts.

Dividing Electronic Instruments into 15 competitive segments, they saw that six segments produced just 26 percent of total sales, but 83 percent of profits. Recognizing this, they focused on selling more of those particular products, both to existing customers and to new ones.

The second most profitable group comprised 57 percent of total sales and 9 percent of total profits. Management training shifted the time spent in that area from 60 to 30 percent and prices raised to boost profitability. For the remainder, the decision was easy, abandon completely!

Looked at another way, the most profitable one-fifth of the business is 16 times as profitable as the bottom four-fifths. A recent German study found the most profitable companies sold fewer products to fewer customers and had fewer suppliers. Simplicity made them profitable because they could cut overhead and focus.

Next, train your people to analyze your customers. A Company found that 20 percent of the customers accounted for 88 percent of profits. This lucrative group included two types: very small, who paid high prices, and very large who placed big orders. The company immediately began seeking out more of both types of customers.

Every organization has a small percentage of customers responsible for most of it’s profits. By training your people to use the principals discussed, they will find out who they are, provide them with outrageously good service and make sure new products are aimed at their needs.

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