The 80/20 rule has been around for over a century and has been used as a tool to help guide and grow businesses since then. When applied in terms of business, the rule states that 80% of a business’s revenue comes from 20% of its clients.
This has obvious positive and negative implications for a business that finds the 80/20 rule applies to them. However, by knowing what those implications are, and by making plans to address them, a business can avoid major pitfalls and continue to grow.
An obvious negative of the 80/20 rule is that a business is heavily dependent on a small number of clients for their income and survival. If one of those clients goes out of business, encounters financial troubles, or simply wishes to take their business elsewhere, it will likely have a devastating effect on the business that is highly dependent on their revenue.
The risks associated with such high client dependency can be lessened through constant communication with the client. Even taking relevant managers and employees of the business out for the occasional coffee and meal could go a long way in strengthening a professional relationship and keeping a valuable client on board.
However, negatives of the 80/20 rule can also arise when a client knows that your business is highly dependent on them for a large portion of its revenue. In this situation, a client may use its power to pressure a business into changing its prices in a way that strongly favours them, which could result in decreased cash flow and profit.
While there are major risks in having a large amount of revenue coming from a small number of clients, there are also some positive aspects. When a business falls under the 80/20 rule, it can be more efficient in the way it focuses and directs its operations.
One way a business can do this is by dedicating the right amount of resources and staff solely to those clients in order to ensure that their needs are met and find other possible ways to generate further revenue from them. By allocating the appropriate resources to those clients, a business owner can then allocate the remaining resources and staff to marketing and other such tasks aimed at diversifying their client base and decreasing their dependence on a few clients.
* * * Disclaimer: No person should act on the general information in this article without taking specific advice from a qualified advisor. * * *