The 80/20 rule (also known as the Pareto Principle) says that 20% of your activities generate 80% of your results.
From this, we derive principles such as 20% of your customers generate 80% of your revenue. Do an analysis – group your customers together by “family” and related entities and see how closely this applies to your business.
Then it’s time to assess whether you keep serving all of the remaining 80%; you are probably losing money on many of them!
Here’s an exercise to apply the Pareto Principle. It’s called the Biggest Check Exercise. Here’s how it works:
1. On the chart, list your 5 best customers (however you define that term)
2. In column A, enter the total revenue you generate annually from each customer and calculate the total of the column
3. In column B, enter the total revenue you could generate if you sold each customer your complete range of goods and services. Now calculate the total
4. Compare the column A total with the column B total and ask yourself, “How should we change the allocation of our marketing and other resources?”
| 5 Best Customers | A | B |
|---|---|---|
| 1. | ||
| 2. | ||
| 3. | ||
| 4. | ||
| 5. | ||
| Total |
Here’s another exercise to help identify customers who should be sacked:
Twice a year, get your team together and ask each person to nominate one, two or three customers for expulsion.
These “bad” customers tend to have certain common characteristics:
1. They are unprofitable or marginally profitable
2. They argue about prices
3. They are slow to pay
4. They are high-risk
5. They complain a lot
6. They are slow to respond to requests
7. They don’t refer new customers
8. They have unrealistic expectations
9. They abuse team members
10. They are rude
Once you’ve decided which customers need to go, you can decide on the best approach:
- Sack them in person
- Sack them over the phone
- Sack them by letter or email
If you decide to do it by letter or email, here’s an example of suggested wording:
Dear John
This letter is to advise you that due to changes in our practice, we will not be available to provide dental care to you and your family in the future and recommend that you engage another dentist. Upon your instruction, we will forward your dental records to your new professional.
Yours sincerely
Joan