Asked by : Ramdas Pawar, Sales/BD Manager, Flex
Industry : IT Products
Functional Area : B2B Sales
Keywords : sales
Activity: Question posted: 07 16 2009 08:14:14 +0000, 5 answers, 602 views, last activity 07 06 2010 20:18:08 +0000
Some argue that 80/20 rule in sales means 80% revenue is generated by 20% sales people, while the other argue 20% sales techniques / processes generate 80% of revenue for the businesses.
How far is this true?
Quality Management pioneer, Dr. Joseph Juran, working in the US in the 1930s and 40s recognized a universal principle he called the "vital few and trivial many" and reduced it to writing. In an early work, a lack of precision on Juran's part made it appear that he was applying Pareto's observations about economics to a broader body of work. The name Pareto's Principle stuck, probably because it sounded better than Juran's Principle.
As a result, Dr. Juran's observation of the "vital few and trivial many", the principle that 20 percent of something always are responsible for 80 percent of the results, became known as Pareto's Principle or the 80/20 Rule.
What It Means
The 80/20 Rule means that in anything a few (20 percent) are vital and many(80 percent) are trivial. In Pareto's case it meant 20 percent of the people owned 80 percent of the wealth. In Juran's initial work he identified 20 percent of the defects causing 80 percent of the problems. Project Managers know that 20 percent of the work (the first 10 percent and the last 10 percent) consume 80 percent of your time and resources. You can apply the 80/20 Rule to almost anything, from the science of management to the physical world.
You know 20 percent of your stock takes up 80 percent of your warehouse space and that 80 percent of your stock comes from 20 percent of your suppliers. Also 80 percent of your sales will come from 20 percent of your sales staff. 20 percent of your staff will cause 80 percent of your problems, but another 20 percent of your staff will provide 80 percent of your production. It works both ways.
How It Can Help You
The value of the Pareto Principle for a manager is that it reminds you to focus on the 20 percent that matters. Of the things you do during your day, only 20 percent really matter. Those 20 percent produce 80 percent of your results. Identify and focus on those things. When the fire drills of the day begin to sap your time, remind yourself of the 20 percent you need to focus on. If something in the schedule has to slip, if something isn't going to get done, make sure it's not part of that 20 percent.
There is a management theory floating around at the moment that proposes to interpret Pareto's Principle in such a way as to produce what is called Superstar Management. The theory's supporters claim that since 20 percent of your people produce 80 percent of your results you should focus your limited time on managing only that 20 percent, the superstars. The theory is flawed, as we are discussing here because it overlooks the fact that 80 percent of your time should be spent doing what is really important. Helping the good become better is a better use of your time than helping the great become terrific.
Here’s twenty ways you can use the 80/20 Rule to live a more balanced life:
From a pure 'Sales Function' perspective, the 80/20 rule would mean that 80% of the firm's revenue is generated from 20% of their customer base.
Now unless the company is in a monopolistic market, this situation is bound to have an impact on the profit margins. One long-term sustainable method of circumventing this issue is by increasing the customer base. This can be achieved by either entering into new markets or by launching new product offerings.
Take s/w for example. Most companies have 80% coming from the US, and India generally reported 20-50 % annual increases. On the other hand, 2002 and 2009 have been singulary Annus Horriblus. 2002 was the time when B2B stood for Back to Bangalore, 2 lakh guys came back, companies laid off 20-40 percent of their work force, some did not pay salaries for 8-10 months and finally dissolved selling their project pipelines to others to execute at a price. I dont need to elaborate this year, as all of us are in the same boat.
Most Auto Ancillaries started off as a supply chain to one major, and then diversified e.g. Lumax, Steering companies, brake lining manufacturers etc. to supply parts to others, and also export activities, building expertise, competencies and retaining new management experiences in the process.
Indian Five star hotels were used to screwing their travellers with room rates ruling twice / thrice what I paid in HK / Tokyo with superior facilities and diversified features that enabled a choice for a tourist, a business traveller, or someone who wants a deal for something like a furnished looked after home. Today, most are challenged to survive as their habits got spoilt, as they never worked strategies to cover 80% of other travellers who have now built loyalties at smaller level chains.
My general advice, retain the 20%, but do study the profile and opportunities within the next 80%.
i personally had pipelines for 1 million USD from Finland from a host of embedded systems companies. No one wanted them mostly around Symbian technologies, today I dont have them, and those companies dont want to work with Indians anymore. There were companies from Korea with Medical Systems and opportunities for companies to do work for them to improve capabilities, again an un-addressed segment. These are personal failures that one cant even report in a resume - I have showcased this here just to highlight what and where such opportunities had they been taken could not done for many companies cutting 30% salaries ...
Makes my blood boil and feel like swinging a cricket bat and thunking idiot organization heads that look for business but spit at these opportunities, but somehow someone above swings a bigger cricket bat and bashes up the US marlet :-).
Message: Times are bad - don't ignore the 80% segment one has not tapped, management lessons come from experiences ... and experiences include pain !
The idea has a rule-of-thumb application in many places, but it is commonly misused. E.g., it is a misuse to state that a solution to a problem "fits the 80-20 rule" just because it fits 80% of the cases; it must be implied that this solution requires only 20% of the resources needed to solve all cases.
The principle was suggested by management thinker Joseph M. Juran. It was named after the Italian economist Vilfredo Pareto, who observed that 80% of income in Italy was received by 20% of the Italian population
20% sales techniques / processes generate 80% of revenue for the businesses.
In other way if we look in to Hospitality and retail sector –
20% of your menu items will give you 80% of your sales, and 80% of it will give you 20% of your sales. Time to look closely at the best and worst sellers on your list, and adjust accordingly.
If you're involved in retail:
* 20% of the items in a shop generate 80% of the sales, and conversely 80% of the items generate only 20% of sales. For a supermarket carrying 20,000 items this means they could remove 1000 items and their sales would hardly decrease at all!
Every where we can apply this principle ---------
Application : 1) Total Quality Control and Six sigma
2) In computer science 90% of the execution time of a computer program is spent executing 10% of the code.
3) Daily reminder focus on 80% of your time on most important thing and reduce wastage of our time on unimportant thing and prioritize our work .
Work smart and in a smartest way
The 80/20 Rule may not always work for you
When it comes to skill building, be careful. It might take 2 years to become 80% proficient but in order to get that last 20% of skill you need to invest another 8 years. (Medical Doctors are a good example of this.)
Be honest with yourself - if you absolutely need to be 100% proficient, focus all your energy to get that last 20%. Otherwise, move on.
No dominating will not help you to lead the team. This will create misunderstanding among the team will will decrease the performance. So need to be a leader but not dominating....
Yes it should be but we are not strong enough either in technology or the political system. So need to build ourselves the required qualities before curbing them !!!
Yes sales is more challenging than marketing. The most critical factor is convincing the clients....