A principle named after economist Vilfredo Pareto. The principle states that, for many phenomena, 20% of invested input is responsible for 80% of the results obtained.

If 20% of your customers represent 80% of your revenue and 20% of your customers represent 80% of your gross margin contribution what should you do? This is the foundation of marketing analysis 101. The fundamental answer is to align your resources with the 20% and either improve or eliminate the other 80%. There are many opportunities to improve profitability just with this simple analysis.

At Robinson Nugent (a public connector company) we applied this analysis to the extensive product line. There were 10,000 products (including the “dippsy down doodle” bass lure). A quick analysis showed that 2700 of the products represented 80% of the profit. In less than 4 weeks we gave customers the choice of discontinuing the low contribution products or accepting significant price increases. At the end of the day we had 3000 products and eliminated 7000, with some products continuing only until the next upgraded product was offered.

The supply chain at ITT Business and Consumer Communications Group had 3000 suppliers for less than 100 different products (please allow license for the precise accuracy of the numbers). We had over 50 procurement managers at an average of $50k salary ($2.5 M annual). The thought was that you needed redundancy to get the lowest “price”. We moved quickly to 300 suppliers (including some “sole” suppliers) and 8 people in the procurement area with an average salary of $65K ($520K annual). True costs went down, inventory management improved, production went up and prices went down for customers and everyone was happy. If you want to hear the “rest of the story” call or email.