When times are good, we seem to be able to do everything right. Rarely do we take the time to step back and look at our customer base. For instance, most businesses get 80% of their revenue from 20% of their top customers. What’s wrong with this you might ask? First, if something happens to those customers at the top, or if they decide to move their business to another supplier, what happens to your bottom line? Can your business survive if you lose 40% to 50% of your revenue?
The Dangers of the 80-20 Sales Ratio
Most business professionals refer to this as the 80-20 Pareto principle. Companies under this principle can one day wake up to the sudden realization that they’ve been operating in a sales vacuum. Simply put, they’ve stopped growing all their customer accounts. Instead of fostering growth, they've come to rely upon one or two big customers. Once they're gone, the business suffers.
There is nothing wrong with having big customers. After all, growing your business is good business. The problem however, is when these large accounts close because of bankruptcy, move their business away, or change philosophies and decide to split your business with another vendor. The consequences can be catastrophic. Here is a list of some of the dangers of operating in the 80-20 Pareto Principle.
- Bankruptcies: In today’s economy, nobody is safe or immune to the dangers of this recession. Everyone, everywhere, is suffering. You must insure your customer’s invoices against bankruptcies.
- Outdated Product Lines: Developing products for one or two key accounts doesn’t address the market’s entire needs. When these customers are gone, you might just find your products are out of date.
- Lack of Growth at Other Customers: How many customers could your business be growing, or could have grown if you hadn’t been so preoccupied with that top 20%?
- Lost Business: This is lost business at other customers, and the eventual impact of lost business when some of the 20% moves away.
Level Out the 20/80 Ratio
First and foremost, you must commit your efforts to leveling out the 20/80 sales ratio. Make it a company wide goal. Explain to everyone what the implications are of one of more of the largest account closing. Don’t scare them, just make them aware of the implications. Take the time to come up with proactive ideas to level out your business. For instance, here are some ideas.
Perform a Sales, Territory and Market Gap Analysis:
With the current business you have, are you aware of how much bigger your customers volume of business could be? If not, start to do a sales account gap analysis. Take your existing business holdings at these customers, and deduct that from what you could be selling. Some of your existing customers may be the ones to help level out your business ratio.
A gap analysis is simply a statement of the business you have versus what remains to be pursued. The customer account gap analysis is used to define the territory gap analysis and then multiple territories are used to define your market's gap analysis. To learn more please go to: Use a Sales Gap Analysis to do a Market Gap Analysis
Marketing, Marketing and More Marketing:
Want to increase your market share, spread out your risk, find more customers and grow your business? If so, then take the time to update your marketing plans. Has your business had its eye on a complimentary market but you were unsure of how to get started? If you don’t have a marketing department, then outsource your marketing. You’ll save money, and be able to measure the impact of each subsequent marketing plan.
You don't have to spend a lot in marketing to get a big return. The video above outlines five low-cost marketing strategies any business can put to use.
Hunt for New Customers and Define Potential:
How many new customers have you got in the past, knew they would be big, but simply allowed them to disappear? Surprisingly, this happens often. Companies become so busy with their day to day functions, that they miss out on those “can’t miss opportunities”. Make a commitment to identifying new customer accounts and put a plan in motion to grow their business.
Once you get a new customer, it's essential that you keep them for the long-term. The back-end rebate and reward program described in the video and table above is an excellent customer retention plan. To learn more please go here.
Keep the Sales Funnel Full:
It’s not a stretch to say that sales is simply a numbers game. The more opportunities your company is working on, the better. You won’t close all of them, but you will be able to identify those opportunities that will allow you to level out the 20/80 rule. Keep your opportunities flowing and new business coming.
Contrary to popular opinion, sales funnels need not be complicated in order to be beneficial. To learn more about keeping your funnel full, please go here.
Balancing out your business is probably not as popular in good times, but I am sure if you're a business owner, you've suffered tremendously during this economic recession with customers who have closed. I am sure it's happened to your business.
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