Italian economist Vilfredo Pareto, who lived from 1848 to 1923, noticed that 80% of the income in Italy was controlled by 20% of the population. Business management thinker Joseph Juran actually theorized that 80% of the outcomes in business come from 20% of causes. He originally called his theory the Laws of the Vital, but eventually named his findings after Pareto’s observations in Italy.
The Pareto principle is now a widely accepted business rule of thumb stating that 80% of a sales force’s revenue is generated from 20% of its clients. I have certainly found that to be true during my career as a seller and sales manager in the media space, and I have used Pareto’s principle to help me focus my energy and that of my sales teams on accounts that were responsible for our bread and butter.
Another commonly accepted business “law of nature” is that measurement improves performance. Google “measurement improves performance” and you will find pages and pages of references, businesses, tools, software programs, excel spreadsheets, and consultants that espouse how important measuring performance is — and how much they can help you if you’ll just click on the link to their website.
Why is analyzing revenue so important? Because the Pareto principle’s impact on a sales team can only be confirmed when sales performance is measured as a part of a strategic analysis of a sales team’s revenue. The results of this analysis should give you new focus into your sales strategy moving forward.
The question I pose here is: How do you measure your sales success? Is it personal income, sales budgets achievement, or any of a hundred other ways to look at success? Do you measure it at all, and if so, how often? Do you use some combination of Excel spreadsheets and a calculator, laboriously pouring over your numbers? Or, do you employ a top-notch strategic measurement tool, or possibly a CRM that accomplishes this for you on a regular basis?
Throughout my career, I have used a couple of different media sales performance software tools that have allowed me to analyze what clients were spending, and how to strategically prioritize each client relationship moving forward, and that has made all the difference in my effectiveness in media sales.
Measurement using Pareto’s principle can be key to really understanding your, or your sales team’s, revenue. Is it true that you find that 80% of your sales really does come from 20% of your clients? Or is it lower or higher than this rule of thumb suggests it should be? If revenue comes from less than 60 to 65% of your accounts, you may need to focus on generating more revenue from your larger, more established partners. You could dig deeper, solve more needs with these existing accounts, and in turn, grow shares of revenue.
If the lion’s share of your revenue is coming only from 10 or 15% your accounts, then you or your team may need to focus on generating completely new client relationships to de-leverage your dependence on those top accounts. If you were to lose one of these accounts, the impact would be too great on your overall revenue position. New business is always important, but especially so in the case that you find your business in that revenue range.
In short, strategic measurement of your client list and revenues using the Pareto principle, coupled with a quality analysis process or quality CRM system, will give you insight into how to grow your revenue and protect yourself from attrition moving forward.