Understanding the principle is one thing, but its application means a much brighter future for your store.
This article originally appeared in the June 2016 edition of INSTORE.
FOR THOSE OF YOU requiring a quick reminder, the 80/20 rule says 20 percent of your inputs provide 80 percent of your results. In business this means 20 percent of your inventory will provide 80 percent of your sales, 20 percent of staff provide 80 percent of results, and so on. It’s one thing to understand the 80/20 rule (also known as the Pareto principle) but it’s another to apply it. Here are some suggestions on how to use it to manage your profits and losses.
1 20 percent of your expenses are 80 percent of your costs. For most stores, rent, wages and marketing are the three biggest outgoings after product purchases. Rent will generally manage itself, but many store owners don’t focus enough attention on controlling wages and marketing. When did you last review these areas? What percentage of sales do they represent? Wages should generally be around 16 percent, while marketing should be 5 to 7 percent.
2 20 percent of your sales staff contribute 80 percent of your sales. Most store owners, however, tend to treat everyone the same. Good employees have choices and are invariably the first to leave. Make sure your most productive staff members are well looked after, not only financially but in terms of their other needs. Do they have a clear career path within your organization? Do you meet with them to discuss this?
3 20 percent of your vendors will contribute 80 percent of your sales. This is a fact for most jewelers, and yet the majority give equal attention to each vendor; and in some cases they spend more time and money with vendors who don’t create a lot of sales than the ones who do. Your vendor reporting system should make it easy to determine who’s bringing in the money, and you need to map out a plan for how to build the relationship further with the key half dozen vendors who you do most of your business with. These vendors need to understand they are important to you and that you want to raise your combined sales further. Few jewelers reach out to vendors in this way — those who do reap the rewards.
4 20 percent of your customers are 80 percent of your sales. If you break this down further you will find that 20 percent of the 20 percent (in other words your top 3 to 5 percent of customers) are contributing around 20 percent of total store sales. This might be only 50 people who are responsible for one-fifth of your annual sales. Sound scary? Yes and no. The thing is, you have probably been treating many of these people the same as the customers who come in only for your annual sale. Building the relationship further and making them feel important could have a serious impact on what they spend with you. If giving them a little bit more love would increase your sales by 5 to 10 percent, would it be worth it?
David Brown is president of the Edge Retail Academy. For information about the Academy’s management mentoring, contact inquiries@edgeretailacademy.com or (877) 569-8657.