The Pareto Principle

Why It Can Become a Marketing Headache

I don't wonder that many companies use the Pareto Principle (or the 20–80 rule). Looking at it, it does make sense. Majority of the sales revenue will likely come from a minority of the customer base. It is also advantageous to the supplier. Imagine, less accounts to visit, minimal buyer warehouses to deliver goods to, fewer accounts to manage, and less servicing to do.

However, as a consultant, I often give a cautious warning about getting too engrossed with the Pareto Principle for the following reasons.

Tendency to rely on a critical few – The 20-80 concept is very interesting as its tendency is to encourage companies to concentrate sales and service efforts on what is called 'key accounts.' For companies with limited resources, this is a strong motivation.

Thus, the tendency is to segment the total customer base and focus on the top 20 accounts. The rest of the accounts are then assigned to less qualified sales personnel, who are given the task to maintain or attrite the accounts, depending on performance contribution.

Being victimized by the law of diminishing returns – We found in many cases that, by pushing on a few critical key accounts, eventually, the window for potential opportunities becomes smaller. Every year, the absolute amount of business volume derived from key accounts becomes bigger and the gap (or the potential business from the buyer not yet with the seller) diminishes.

Sooner or later, the key account will have given almost all potential business to the seller. So, the percentage growth becomes smaller with each passing year.

'Customer Is King' era – This is still the motto of many companies that believe the customer must be followed at all costs. This is not an issue, for so long as the key account being serviced also knows its obligations or responsibilities. But what I see happening is, in certain cases, the key account violates the arrangement and policies. There is also a tendency to pamper key accounts, since losing them will be more costly.

Missing the bottom line focus – With a focus on sales revenue, the pitch is therefore more orders, more sales, more Pos. So the top-line is a healthy picture with graphs showing a northward trend.

The concern now is whether the bottom line or margins are still protected. At times, sales to key accounts increase, but margins are sacrificed in negotiations. In the end, the resulting sales are not as profitable anymore, a case of familiarity breeds contempt.

The smart buyer will always use the additional business sales they are giving you as a reason to ask for more concessions, lower pricing, and even better upgrade of service resources, all affecting contribution margins from the seller's point of view.

Shifting from growth to protect – Companies eventually realize, painfully, is that keeping key accounts translates to the strategy of 'protect' rather than 'growth.' Since more efforts and resources are given to big accounts, losing them becomes a reality.

The strategic intent of a company now moves from growth into protect mode. The company starts to think that 80% of the accounts should not have been merely relegated to the rest of the sales force. Rather, another tier (perhaps, the next 30%) should have been selected and aligned within the account team. In case the first 20% key accounts are moved into protect mode, growth can still be viable in the next 30%.

The good thing about the Pareto Principle is it places priority on accounts management and servicing. But to be blinded by the concept of 'key accounts' will create a disaster waiting to happen in any business organization. So rethink the pitfalls of the Pareto Principle before you start planning your strategies for the year ahead.

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