For Business Profitability, Understand the Law of the Vital Few

How well do you know your customers? Which ones are the most profitable? Which ones take most of your time? Finding the answers to these questions can be worthwhile, because you may discover that the 80-20 rule, also known as the law of the vital few, applies to your business. The rule is a shorthand way of saying 80% of your profits come from 20% of your customers.

If you can identify that top 20%, you can focus your efforts to make sure this group remains satisfied customers. Sometimes all it takes is an appreciative phone call or a little special attention. Also, by understanding what makes this group profitable, you can work to bring other customers into that category.

Keep in mind that it’s not always profits alone that make a good customer. Other factors, such as frequency of orders, reliability of the business, speed of payment, and joy to deal with are important too. Ask your accounting staff and your sales staff. You’ll soon come up with a list of top customers.

There’s another way in which the 80-20 rule applies to your business. Very likely, 80% of your problems and complaints come from 20% or fewer of your customers. If you identify those problem customers, you can change the way you do business with them to reduce the problems. Consider changing your pricing for those customers so you’re being paid for the extra time and effort they require. Sometimes the only solution is to tell these customers that you no longer wish to do business with them.

We provide operational analysis reporting with a consultation by a CPA as a stand-alone service to answer these critical questions to lead to improved decision-making and increase the bottom line. For details see Financial Forecasts, Budget Planning, & Analysis and call our office if you are interested.

We work with many corporate clients who value a highly experienced CPA firm to be their trusted business advisor in a long-term relationship. With a focus on much more than compliance, we discover and implement effective business strategies. Our specializations include tax planning and outsource accounting. Explore our services  at Management Advisory Services and Outsource CFO and Controllership and contact us to request a free thirty-minute interview to determine if we can help you.