My company did not do well during the Great Recession (December 2007 through June 2009); I did not prosper or thrive. In my core industry, equipment deliveries dropped from 189,794 to 85,784 units and didn’t exceed pre-recession levels until 2015. It was not a pleasant time. I didn’t lay anyone off, but I didn’t replace departing employees either.
In 2010, mainly because I and my staff had plenty of time on our hands, our management team began spending a couple of hours each afternoon studying growth. We read and studied literature in the hope of finding a practical a solution; a solution we could use to grow our business and help our customers too.
One afternoon, one of the managers wondered out loud how the 80/20 Rule impacted growth (see https://en.wikipedia.org/wiki/Pareto_principle). I’m one of those guys that never met a number he didn’t like, so I decided to dig into that. What I learned surprised me.
As a business application, the 80/20 Rule states that 80% of revenues are generated by 20% of customers. So I asked one of our customers to share a year’s worth of sales data with me, which he graciously did, and I began analyzing it.
I dumped his sales data into a spreadsheet, sorted it by customer and their purchases by category, and then calculated the total annual purchases. Then I sorted the spreadsheet into descending order and added up the total purchases of the customers in the in the top 20%.Below are the results from studying one of his branch locations.
Mathematically, the average customer in the top 20% spends $16 for every $1 spent by the average customer in the bottom 80%. But in all honesty, when I did the analysis, and I’ve done it on dozens of businesses, I never found the actual revenue ratio to be that low. Usually, it’s in the low 20s. Immediately, I saw that you could use this information to influence growth. Here’s how.
I took the branch data and did a demographic study of the customers in the top 20%. Next, I compared the demographic to the qualified businesses in the customer’s sales territory. I downloaded a list of all of the qualifying businesses. Then I removed the branches’ customers from the list. What was left was a list of his competition’s most valuable customers. And I focused our marketing activities on them.
That is a brief explanation of how you take control of deal size. The mechanics of how to do it vary from business type to business type, but you get gist of the process. By controlling deal size you have the ability to consistently take market share from your competition.
And here’s the best part. They will be powerless to stop you, unless you share with them how you are doing it. And I promise not to tell them.