# The Pareto Principle for Profit Improvement

The Pareto Principle (also known as the 80-20 rule) is named after an Italian economist named Vilfredo Pareto. While this principle can apply to many areas of business, let’s look at two possible applications in your small business:

Possibility 1) 80% of your profits come from the top 20% of your customer base.

Possibility 2) 80% of your customer frustrations come from the top 20% most frustrating customers (better known as the bottom 20% of your customer base).

If the second possibility exists in your business, the reality is that your bottom 20% of customers provide you with no profit at all and in fact are likely costing you money!

How do we check this?

We can do a Pareto Analysis on your customer base.  Here’s a simple step by step process:

Step 1) Make a list of your current customers.

Step 2) Determine a ranking system for your customers.  A sample would be to score each customer from 1 to 5 on the following attributes:

•      Payment history – 1 for a quick payer to a 5 for a delinquent.
•      Hassle factor – 1 for never a problem to a 5 for a continuous hassle.
•      Likability – 1 for we really like working with them to a 5 for we hate them.
•      Value for price fit – Score a 1 if they appreciate and really value what you do for them and to a 5 for no appreciation and less desire to pay for your value.
•      Risk – Evaluate the business risk of doing business with each customer – 1 is for lowest risk and 5 would be the highest.

The above are just examples. You decide the correct attributes of a good or bad customer.

Step 3) Rank the customers according to the ranking scheme.

Step 4) Consider the top 20% of the customer ranking.  If Pareto was right, the top 20% of your customers are where you make most of your profits. Don’t forget to thank these customers!