In this post I will refer to a common rule of thumb in business and not only, called the Pareto principle, or also known as the 80-20 rule. Personally I believe that this rule should be applied by any trader/supplier in our industry. Actually, 80-20 rule is useful instrument for bodyshop owners as well, but this I will analyze in some of the next articles.
If you haven’t stumbled upon 80-20 rule yet, here is the definition. So, the Pareto Principle is named after the Italian economist Vilfredo Pareto, who, in 1906 discovered that 80% of the land in Italy, was owned by 20% of the population. But the most astonishing about this rule was that this 80-20 distribution occurs very frequently especially in trade and business generally speaking. For instance, about 20% of your customers represent 80% of your sales! while 20% of your effort (time, money invested in stock etc) gives you close to 80% of your profit.
You may ask me, how exactly the Pareto Principle can be used by automotive refinishing supplies shop? Let me bring to your attention some facts from my own company – Alexport- and Etalon range of products.
– 20% of Alexport’s customers in Greece (15 key customers) make up 80% of the total sales in the country out of 82 customers in total (who represent the rest 80% of the total number of clients)
– out of 32 countries, where Etalon refinishing products are sold, 6 countries make up close to 80% of exports revenue. Again 20-80% rule fits perfectly.
– 80% of all overdue accounts receivables are coming from 20% of the total customers number.
– 150 product codes out of about 700 products in stock, represent 80% of Alexport’s sales, while the rest 550 products bring us just a little more than 20% of the total turnover. This list can go on and on.
If you will conduct a small research of your shop’s activity, I am quite sure that you will find a lot of proofs for 20-80 rule:
– Which grits from abrasive discs amount to the biggest percentage of the sales in comparison to the total grits of your stock?
Comment: Perhaps you should never run out of those grits
– How many customers out of total give you 80% of your sales?
Comment: Probably it is wise to invest more time in them.
– From the total number of your suppliers, how many of them provide you with the most valuable (in sense of profit and revenue) goods?
Comment: Treat them well. In hard times they can save your business.
– What are the tasks, which consume a lot of your time, but contribute little to your key job – selling products?
Comment: Outsource or delegate these tasks if possible
I have read a wonderful book written by Marshall Perry, named “80/20 sales and marketing. The definitive guide to working less and making more”. I strongly recommend you to read this book. You will learn a lot of mind-blowing facts about the Pareto Principle, like this one; 20-80 rule is exponential, meaning that the top 20% of the top 20% of your customers (or the top 4%) represent 64% of your business. I guess now you understand on whom to spend your time and resources?