“80/20 Rule” Upgrades

“80/20 Rule” Upgrades1

For high “Return on Management Effort” (ROME), we focus on the “vital few” that can make the big difference. In 1906,Vilfredo Pareto, an Italian Economist, discovered that 20% of the population (cause) owned 80% of the land (effect). This “power law” observation was popularized as the “80/20 rule” by quality guru, Joseph Juran. Other “power laws” are: frequency of word usage (1/80); internet content contributors (1/90); size of earthquakes; etc.

How can we improve on 80/20 thinking? If 80/20 gets us into the right ball park, what rules will get us to the best, net-profit-improvement sections and then to the best, net-profit seat in the section? Don’t we want to pursue highest return, lowest-risk, lowest-investment opportunities first?

Net-Profit Contribution Power Laws:

Distributors that have cost-models for determining the net-profit contribution for each “line item” can roll up this “quantum profit data”2 to find the following relationships in increasingly useful order:

  • 20% of the customers generate close to 80% of the sales (Pareto’s only application)
  • 30% of the customers generate around 70% of the margin dollars (least extreme ratio)
  • 20% of the customers generate 140% of the net-profits (top 10% => 100% & 1=>35)
  • Bottom 1% customers lose (20%) of the 140% peak internal profit total (fix these ones!)
  • 5% of the SKUs generate over 500% of the peak internal profits (Why? How? Sell more?)3

Amplify/Acutate Net Profit Rules With Additional, Leverage Factors:

  • 4% of customers within mature industries are perpetual innovators that will generate 80% of the future growth in that industry. Much of this “growth” is not “new demand”, but stolen share from non-innovating, only-reactively-adapting competitors. Partner the profitable, “gazelle accounts” to grow profitable sales.
  • Any distribution branch can offer “perfect service guaranteed” plus heroic extra efforts from all employees for aboutten, best, profit-growth-potential accounts. (Do it!)4
  • The few, super-loser accounts can have good – sales, margin and margin percentage – stats, but kill us (and them) with excessive service/buying activity costs. These relationships can be transformed into win-win ones.5
  • If management does “audits” of key accounts to insure that every aspect of the inter-business replenishment process and people are fine-tuned 10’s, guess what? There will be plenty of “tweaks” that will yield big results for both companies. No one has been responsible for optimizing the inter-business-process; be the first! Then, summarize the refinement opportunities for each customer and offer to make all upgrades happen at our expense along with a new “perfect service guarantee”?6
  • The best 10% of your sales force can help new, upside things happen at key accounts (with management and total-team help) better than the bottom 50%. Don’t let coasters sit on key account potential and waste total-team efforts. What is the one most promising account renewal, reassignment opportunity you can find? Try it!

Net-Profit, Power-Law-Management Results:

A profit-center (branch) can:

  • Turn big losers into winners and gain 20%+ more volume, because the customers would be so grateful for the big improvements in supply-chain savings and up-time effectiveness.
  • Get 20% + more volume from best accounts “where we are getting all of the business”.
  • Get bigger, average order sizes with best incremental margin flow-through to profits due to:
    1. Better-tuned replenished systems;
    2. More thorough penetration selling of core items for which..
    3. Fill-rates were increased for the most profitable SKUs
  • Grow net profits 2X+ faster than sales which would grow 2X+ faster than current trends.

Stop everyone from “working harder” at reactive adaptions and fine-tuning whatever they have been doing. Focus instead on narrowly and intensively experimenting where net-profit growth can best happen.

“5-5-5 ROME” Program At Every Branch; Learn More:

For every location, identify and track the progress of the: 5 most profitable customers; 5 most profitable, future-growth gazelles; and 5 biggest losing accounts. Provide some training on how to take each category of customer to the next level7. To get really good at all of this, put a hold on October 20-21st for the “Advanced Profit- Improvement Conference” in Chicago. Learn more about power-law management tactics from both successful distributors and experts.

For more immediate enlightenment (and results), request a demo on Waypoint Analytics’ “quantum profit management service”.

Bruce Merrifield


  1. All previous “Strategic Insights” and footnotes are posted at www.merrifield.com under the “insights” tab.
  2. See all at www.quantumprofitmanagment.com
  3. For a detailed, how-to “script” for how to sell more, most profitable items see Ex. 61 at www.merrifield.com
  4. For how-to script on “heroic acts by everyone for key accounts” see Ex. 63 at my site.
  5. For how-to script on “super losing accounts into winners” see Ex. 62 at my site.
  6. For management training manual on how to do “audits” etc. see Ex. 59 at my site.
  7. Training kit on 5-5-5 selling is Ex. 44 at my site.