The Pareto Principle and Value-Added Selling

May 27th, 2010

By Tom Reilly, author of “Value-Added Selling”

At the end of the 19th Century, an Italian economist, Vilfredo Pareto, was studying the wealth patterns of western Europe and observed a fundamental imbalance—most of the wealth was owned by a small number of people. Pareto, an avid gardener, observed this same imbalance in his garden. Most of the peas he harvested came from a small number of pods. These insights gave birth to a theory that has been called variably the Pareto Law, Pareto Rule, Pareto Principle, 80-20 Law, and 80-20 Principle. Fundamentally, this principle states that a lot comes from a little—80 percent from 20 percent. Is it always 80-20? No. Sometimes, it is 70-30, 90-10, 85-15, and so on. The principle describes leveraged outcomes. This can be applied widely across life. For example:

• 80 percent of your results come from 20 percent of your efforts.
• 80 percent of your growth comes from 20 percent of your investments.
• 80 percent of the calories you consume come from 20 percent of the foods you eat.
• 80 percent of the complaints you hear come from 20 percent of your customers.

Following Pareto’s observation, 80 percent of the value you extract from your market comes from 20 percent of your customers, High-Value Targets (HVT). Conversely, 80 of the loss you suffer comes from 20 percent of your customers, Profit Piranhas (PP). The remaining 60 percent of customers are Equity Customers, those from whom you get as good as you give.

The daily reality of running a business is cash flow. For salespeople, time is money. How you manage your time determines how your cash flows. This reality coupled with the Pareto Principle gives you the unique opportunity to invest your sales time for maximum return. Invest heavily in your HVT’s—this is where you will get the highest return on your investment. Seek ways to manage your PP’s for greater profitability. This means identifying how and why they cost you money and rectifying this. Build solid relationships with your EQ’s—they are the solid core of your business.

Get the latest Sales Bytes from Tom Reilly by subscribing to our RSS Feed.

Read More Sales Bytes

You can read more Sales Bytes, or you can subscribe to our RSS feed to receive them as soon as they are available.

Subscribe to our RSS feed to receive the latest news and updates from our site, including Tom's Sales Bytes. (learn more about RSS Feeds)

The Most Recent Sales Bytes:

• Inside The Mind of the Cheapskate
  - Added: September 9th, 2010
• How Persuasive Are You?
  - Added: August 5th, 2010
• How many of these questions can you answer in-depth?
  - Added: July 27th, 2010
• Dreaming Bigger about Business
  - Added: July 21st, 2010

See our full list of Sales Bytes from Tom Reilly.