In business I use the Pareto Principle of 80:20 all the time, as it always works. Pareto calculated that 80% of the land in Italy was owned by 20% of the population. In business for example we find that 80% of our revenue will come from 20% of our client base.
I have used the Pareto Principle to highlight other business issues that we all face on a daily basis including “problem clients”. In every case I have investigated, 80% of the business problems are caused by 20% of the customer base.
I work across a wide variety of industry sectors but they all have one thing in common, problem clients. These accounts form a small proportion (20%) of their total account base but they cause a disproportionate amount (80%) of issues for the business. These are the demanding clients that just take and take, they ask the most favours, they demand the greatest discounts and they constantly blackmail you with threats to use your competitors. They make YOU pay even if it was their error on the basis that “the customer is always right”. They over estimate to you what they will buy but then fall short. They expect immediate delivery and response times from you but they take 90 days plus to pay, when your terms are 30 days. They promise you an exclusive supply agreement and then break it. I have a word for these types of customers “parasites” and if you let them they will literally suck your business dry!
So why do we put up with such clients? Many business owners and sales managers think that ALL revenue is good news and that the ‘non-problem’ clients more than make up for the bad ones. Well they don’t and here’s why you must act!
When I researched ‘parasite clients’ recently for a company I was working with, it was apparent they were sapping 80% of their business resources! Staff spent more days per month engaged in ‘fire fighting’ for parasite clients than they did on account management for their BEST ones! Staff would get stressed and make demands on other departments to prioritise ‘this and that’ at the detriment and delay of other work (for ‘good’ clients). They would pay over the odds for same day courier services as these clients wouldn’t accept the usual ‘next day’ option. Tension between departments had meant a disconnect and lowering of cooperation. Staff moralle and engagement was also affected.
All of this then had a knock on effect which meant that regular ‘good’ customers (who didn’t make a fuss) were now getting poor levels of service. This resulted in them starting to complain, taking up yet more time and resulting in credits or lower prices to placate. I calculated for this client that by dropping the parasitic accounts COMPLETELY the revenue lost to the business would be about 10% of total turnover. However the sales team would have 80% more selling time. Now I work in sales performance but you don’t need an expert to tell you what the impact of that much more selling time would be on revenue. They would soon make up the 10% and go way beyond. Another great benefit is that you are PASSING the parasite to a competitor! and THEY now have the problem NOT YOU!
If you recognise that this is happening in your business then I urge you to take immediate action. Arrange to meet with problem clients and talk through your concerns, either they will agree to work with you on more of a win-win basis, or you will decide to stop supplying them. That decision takes ‘bottle’ but I have not yet met a successful business owner that lacked courage.