How to apply the 8-20 Rule to your Coupon Clipping Service
I don’t remember how old I was when my dad first told me about the 80-20 Rule. I always thought it was just his own little rule-of-thumb but it turns out it’s a scientifically proven principle that applies not only to business but every area of your life. Let’s take a look at the Pareto Principle: What is it and how you can use it to double your sales.
What Is The 80-20 Rule?
Wikipedia says: The Pareto principle (also known as the 80–20 rule, the law of the vital few, and the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes.
The 80-20 rule is one of the first rules business majors learn. It’s applied and used in every boardroom and production facility in the world.
I say ‘applied and used’ because the 80-20 rule is used in two ways. First, it’s used to analyze the business and identify areas of concern, then it’s used to affect those results. Let’s take a look.
Applying the 80-20 Rule to Your Customers
Break down any business, no matter what it is, and any area of that business, and the stats will always follow the 80-20 Rule. They may not be exactly 80-20 but they won’t be far off.
- 80% of your sales will always come from 20% of your customers
- 80% of your profits will always come from 20% of your customers
- 80% of your time will always be spent serving 20% of your customers
- 80% of the top 20% of your customers will order from you forever and never complain
- 80% of the bottom 20% of your customers will suck up 80% of the time you spend troubleshooting customer problems
And the list could go on into infinity. Focus on any area of your business and you’ll find the Pareto Principle will always apply.
Analyzing Your Customer Base
To keep things easy and neat, let’s say you’ve shipped to 100 different customers and your total sales for all of their orders was $1,000.00.
If you made a list (and you should) of how many time each customer ordered from you, the size of their order and whether or not there were any problems or refunds involved, you would most likely find:
20 customers were responsible for $800 in total sales, which means the other $200 in sales was spread out over 80 customers.
And this is where it gets really interesting…
Taking it a step further, apply the 80-20 rule to those 80 customers who comprise only 20% of your total sales. 64 of those 80 customers were responsible for a total of only $40 in sales. That’s 64 percent – almost two-thirds of your total customer base – and all together they only put $40 in your pocket. And that’s before you take out stamps, envelopes and compensation for your time.
But let’s take a look at that, too, because the cost of doing business is extremely important, especially when your average sale is only about $6.00.
Again, let’s keep it neat and easy and we’ll say those 100 customers each placed one order and each order required only $.49 for postage. That would be a total of $49 for postage.
You spent $9.80 to mail out $800 in sales. Conversely, you spent $39.20 to mail out $200 in sales. Taking it that one step further like we did above, you spent $31.36 to mail out $40 worth of coupons. Scary, huh?
Applying the 80-20 Rule to Your Business
Analyzing Product Performance
80% of your sales will come from 20% of your products
I get at least one email a week that says, “I’ll be working on my listings tomorrow. I don’t have time to get them up today.” Seriously? You can’t find the time to put up 4 or 5 listings?
The average insert has around 50 – 75 coupons. Let’s use 50 because it’s easy. Take a look at your past results and you’ll find that 80% of your sales came from 20% of your listings. If there are 50 coupons in that insert then you’re only really going to sell 10 different coupons. And of those ten, TWO will be your top sellers.
- If you can’t pick the top two sellers out of an insert by now then you haven’t been paying attention.
- If you can’t find time to put up two listings then you need to better organize your entire life.
The lesson here is this: You’re missing sales! Take the time to get your 20% listed and let the 80% wait!
Analyzing Time Management
80% of your time will be spent serving 20% of your customers
This is where it gets tricky in the coupon clipping business and in THCM. Generally, a larger order means more time spent clipping, but it might be and order for a large number of just one coupon so it’s quick and easy to clip. So let’s assume you spend the same amount of time on each of your 100 orders.
In most cases all customer problems come through me and most of them never make it to you. However, those that do make it to you generally require a good amount of your time. You have to research the order and maybe you have to re-clip and re-ship the coupons.
In any case, if you were to analyze the time spent on resolving customer issues, it’s a good bet that together we spend 80% of our problem solving time on only 20% of our customers.
And from my own experience clipping orders I think it’s also safe to say that even on large orders of multiple coupons, if the order was going to one of the Top Tier Customers it required very little time in the grand scheme of things.
How to Use the 80-20 Rule to Double Your Sales
Use the 80-20 Rule carefully. We recently sent out a list of Banned Customers. There are only 11 people on that list. We’ve been compiling it for a year and we put a lot of thought into where we were going to draw the line. Don’t just cross a bunch of your customers off your list sinply because they’re in the bottom 20%.
Identify Problems and Make Changes
The purpose of the 80-20 Rule is to help you identify problem areas in your business. But in any business you don’t just drop something because it’s a problem. You try to solve the problem, first.
Identify the top 20% of your customers who are responsible for 80% of your sales. Chances are these people are already happy with your service. Don’t waste time trying to figure out what MORE you can do for them – they’re already happy.
Identify the bottom 20% who are responsible for sucking up your time, envelopes and stamps. What can you do to move them up the list? Is there ANYTHING you can do to move them up the list? If not, don’t waste your time, energy and resources trying.
How does the 80-20 Rule Affect Your Sales?
Keep in mind that your list will always be changing as you work to move the bottom 20% up the list. Your top 20% will also change but here’s the thing:
Those in the top 20% will always stay near the top in terms of total dollars spent, as long as they keep couponing and you they remain happy with your service. What changes is your total sales as you move customers UP from the bottom. As customers become happier and more confident in your service they spend more money.
Now, moving customers up from the bottom tier, and up through the ranks of the middle 60-percent means you’re going to have to spend some time and/or resources convincing these people that your service is the best. This means you’ll have to use the 80-20 Rule to identify where you’re already spending your time and resources and decide if they’re being spent effectively.
Your Task For Today
Apply the 80-20 Rule to Your Coupon Clipping Service
First, let me warn you – You can use the 80:20 rule to analyze even the tiniest, most specific area of your business. The ratio will always come out 80:20. If you’re like me and you like numbers and stats you’ll find it can be a huge time-suck. So be careful!
Second, don’t bite off more than you can chew. Analyzing your entire business and deciding where you need to make changes isn’s something you can do in one day.
Pick one area of your business to focus on. For example, maybe today you could look at how many orders you’ve shipped this week vs order amounts.
If you shipped 100 orders over the past week or the past month, and you totaled $100 in sales, chances are you’ll find that 20 of those orders combined totaled around $80.
Now, who were those customers? And how much time did you spend on each one? And what about the other 80 envelopes? Were they first-time customers or repeats? What did they order? Why didn’t they order your HOT coupon? Why did they ONLY order the HOT coupon? What can you do to get them to order more? Should you send them some freebies or have you already wasted enough time and resources on that customer?
See? Like I said, once you start thinking in terms of 80 vs 20, it snowballs into every area of your business!