The Pareto Principle: a proven way to surpass your sales targets

21 September 2015 Kieron Johnson

Every salesperson worth their salt has a constant eye on their sales targets – hoping to smash them in one way or another. The norm is to do this by securing new customers, which is a good idea. But a great idea would be to consider the hidden gem within: their existing customers. This guide will look at the diamond in the rough and see how it can help polish up your sales figures.

Getting more customers isn’t always the answer to reviving dwindling sales figures. Sometimes, it’s about concentrating on the few customers you do have and making them work for you. Pushing a new product or service to an existing customer has lower cost of sales and momentum is easier to build due to your pre-existing relationship.

If, in the pursuit of sales, you’re neglecting your existing customers, you could be making a grave mistake.

Want to resurrect your sales efforts? Read on.

Customer numbers: why fewer may be better

Increasing customer numbers (and market share) are goals of every marketing and communications campaign.

But it’s good not to lose sight of the customers you already have. Here’s three reasons why.

1.Losing a customer means lowering your margins

Let’s say your marketing campaign pulls in one new customer and you lose an existing customer due to not paying them enough attention. You’ll still have the same number of customers. But the difference is you’ll have lower margins. Why? Because it costs a lot more for businesses to secure a new customer than it does to keep an existing one .

So you end up losing ground through decreased profits triggered by increased marketing costs. Not cool.

2.Holding your ground means gaining ground

There are times when standing still means you actually move forward.

For argument’s sake, let’s say you have a 14% share of a £100m market. So, your sales are £14m. Assume two new competitors enter the market, increasing its size to £110m.

If you’re able to maintain your market share at 14%, your sales will rise to £15.4m. This means some of your rivals will lose ground to the new market entrants (that is, their market share will decrease) while yours increases.

3.Selling to existing customers is easier than selling to new ones

It’s way easier to sell products or services to people you do know (customers) than people you don’t (prospects).

If you’ve produced the goods for customers in the past (excuse the pun) and they’ve been happy with it, they’re more likely to agree to try out a new product line. Your pre-existing relationship means less expensive selling will be needed.

Maximising sales from your existing customer base involves making use of the ‘Pareto Principle.’

What is the Pareto Principle and how does it work in practice?

The Pareto Principle (or the ‘80/20 rule’) is so-called after the Italian economist, Vilfredo Pareto.

In the early 1900s, Pareto found that 80% of Italian land was owned by just 20% of the Italian population. But it’s the extension of Pareto’s findings that has a real game-changing effect. For instance:

  • 20% of your customers make up 80% of your revenue (sales).
  • 20% of your input produces 80% of your output (productivity).

So, the challenge you have is to determine which 20% of your input produces 80% of your company’s output. When you do, you can dedicate more time to this activity and spend less time on others.

Similarly, you’ll need to work out who the top 20% of your customers are (that produce 80% of your sales) and focus your firm’s efforts on them.

Here’s the real kicker though. A chap called Perry Marshall claims that the Pareto Principle is exponential. According to him, the 80/20 rule also applies to the 20% of your customers who make up 80% of your sales.

In other words, the top 20% of the top 20% of your customers (that is, the top 4%) represent 64% of your sales (calculated as 80% multiplied by 80%). So, you can identify the customers with characteristics of the top 4% and find others just like it. Marshall says the beauty of the Pareto Principle is that it scales to the power of three, four and so on.

Sensibly applied, the Pareto Principle can see your sales stats go from strength to strength. While new customers are always welcome, you need look no further than the ones you already have to turn your business fortunes around.