Richard Koch on the 80/20 Principle

80% of your revenue comes 20% of your customers.

You’ve heard that already, almost everybody has.

But what Richard didn’t know was that profit is not the same as revenue.

80% of your profit DOES NOT come from 20% of your clients.

The stats on profit are a little different than that.

I’m not talking tiny amounts in difference. A little sprinkle here and there. It’s the difference between a slow spring drizzle and turning on the fire hose.

What Richard Koch didn’t know when he gave this speech was that a couple of years later a Chicago consulting company was going to put the 80/20 principle to the test - with actual real world data from their clients.

They had a 1000 clients and they took their customers’ data and analyzed it for revenue, cost and profit.

After breaking their clients data down here’s what they found.

The revenue were very consistent with the 80/20 principle. The top quartile of customers (the top 25%) generated 89% of the revenue. Right where you’d expect it be.

The bottom 25% of customers only generated 1% of the revenue. Again right where you expect when looking at the 80/20 principle.

When you start looking at profit is where it get a little crazy. The thing you have to understand about the 80/20 principle is that it doesn’t always line up 80/20. Sometimes it’s 90/10, sometimes it’s 70/30.

At times you can really refine it and get to the top 1% that generate 50%.

But, it’s always...

Small hinges swing big doors - Perry Marshall

And that’s what you should constantly be looking for.

Back to profit.

The middle 2 quartiles of these companies were pretty much break even.

The bottom 25% of customers resulted in a profit loss of 50%.

Wait…what? How can that be? 75% of your customers are essentially causing you to lose money! You’re not going to be in business long like this so how does this work out?

It’s because the top quartile generates 150% of the profit.

Let me repeat that...the top clients generate all of the profit!

All your other clients are costing you time and money and then kicking you in the shins on the way out the door!

I’m not saying you should treat your clients poorly or ignore them. You should know who your top clients are and design systems and offerings that will make their dream come true. And build your business so you can attract more like them.

When you focus on creating systems that you’re top clients want. It will automatically filter down to your other clients. And guess what…you have more diamonds in the rough ready to be chiseled out of your bottom clients.

They only need to be given the opportunity and the offers that your top clients want.

That’s why you need to focus on cloning your top clients.

Watch the video here that explains the rest of the story on why everybody is not your market.

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