The 80/20 Rule is Alive and Relevant

The 80/20 Rule is Alive and Relevant


The 80/20 Rule is generally appropriate when examining two critical performance indicators 1) inventory - 80% of revenue comes from 20% of the product mix, and 2) sales - 20% of customers generate 80% of a firm’s revenues.

Another perspective to consider:

  • 80% of the inventory is not productive, and
  • 80% of the customers contribute minimally to the total sales effort

These numbers are not acceptable for high-performing businesses.

Recent news reports indicated that Ralph Lauren has made significant changes in their business, including store closings and returning to product mix basics. It was reported that 30% of their merchandise generated 70% of the sales revenue.

It’s natural to want all the customers we can get and to have products to meet all their needs. Unfortunately, there is a huge expense associated with these inefficiencies. 

Be proactive.

  • Review sales histories to identify inventory that is performing and close-out the rest. Physical inventories are mounds of cash that lose value everyday they don’t sell, an expense which drags the company down.
  • Determine the lifetime value of your customers. How much revenue will a loyal customer generate over a number of years? Rank your customers and focus efforts on the most valued.
  • Evaluate the value of your remaining customers. Develop those with high-growth potential. Refer the rest to alternative resources.
  • Focus on the indirect cost of sales. It costs just as much, or even more, to service a $25 sale when compared to a $2,500 order.