This is our second white paper on the Pareto Principle, or 80/20 Principle. In the first installment we covered the original expression of this principle by an Italian economist named Vilfredo Pareto back in the 1800’s. He discovered that there was an uneven distribution of yield (80%) from a corresponding level of input (20%). We have already discussed how this principle is evidenced in numerous businesses today, primarily in that many businesses derive 80% of their revenue from 20% (or less) of their accounts. The paper went on to discuss the reasons for this phenomenon and ways to deploy a value-appropriate way of covering low-end accounts.
This paper deals with the Pareto Principle as applied to products - when companies derive a disproportionate amount (80%) of their revenues from a small set (20%) of products and what can be done to create a more even distribution.
4 Common Scenarios
For many companies, a broad product portfolio is both a blessing and a curse. On the positive side, a company with more than just a few products has numerous avenues to penetrate accounts and multiple ways to generate revenue. The flip side to a broad product set is the expertise and focus required for a sales organization to adequately represent a full line of products. If you have separate sales organizations, you may have cost-of-sales issues. There are manufacturing costs and other financial variables associated with making and distributing a broad set of products.
As a result, many organizations find that the majority of their revenues come from a small set of SKUs, despite the fact that they have a full spectrum of products.
Perhaps the most common reason many products generate only a small amount of revenue is that they address the needs of small markets with limited demand. There is no way each product can deliver an equal contribution to revenue. These low-revenue products must be carried because buyers want to work with a few select sellers who offer a full line of products; it is most cost-effective for them to purchase this way.
A second challenge is that sales representatives will naturally focus on higher-priced/higher-margin products at the expense of lower-cost ones. Furthermore, a broad product set often means selling into numerous departments within one organization. In these cases, the selling organization must have a working knowledge of all people associated with purchase decisions in each of the numerous departments. Most companies fail to build and maintain a database of information necessary to effectively market and sell the complete line of their products. This is a problem of limited sales coverage for the full product line.
A third reason for this phenomenon is that a product line responsible for producing significant revenue may be growing obsolete and competition is capturing a large share of the revenue you formerly counted on. This is a problem of customer attrition from a product line. In this case the need is to reallocate valuable sales time to growing product lines while maintaining the remainder of the customer base until a new competitive product can be launched. An effective customer retention solution is needed.
One final reason for limited product revenue stems from the fact that the product may be relatively new. Significant marketing education efforts are necessary before sales people can be effective at closing; buyers are simply learning about the product and distribution channels are being developed. Typically, the more innovative the product is, the longer this takes. This is a marketing problem.
The common challenge in all of these cases is this: How to cost-effectively sell more low-revenue products without taking sales time away from high-revenue products.
If sales representatives within your organization migrate to higher-end products at the expense of lower-priced ones, an alternate, value-appropriate method to market and sell these underrepresented products may be in order.
#1 - Analyze data For Cross-Sell Opportunities
One potential solution is to build a database of historical sales transactions and conduct analytical modeling to predict which existing customers are likely to purchase additional products from you, including those sold less frequently. The best indicator of what might occur in the future is what has transpired in the past.
For example, retail marketers are aware that Wal-Mart has built one of the largest corporate marketing databases and has developed sophisticated cross-sell models. In one case, analysis of this data revealed to Wal-Mart that stores located in cities recovering from a natural disaster like a hurricane or earthquake had a spike in sales of Strawberry Pop-Tarts. It sounds strange, indeed. Based on this knowledge, stores located in these disaster-stricken cities now receive shipments of generators, chainsaws and bottled water along with — you guessed it — Strawberry Pop-Tarts! There is a pattern to your customers' purchasing patterns. Once analyzed, it would reveal that customers who purchase a given product are far more likely to purchase another one based upon similar behavior among other clients.
Once these predictive models are established, you can implement highly targeted cross-sell offers to specific clients. Instead of extending to your entire customer base the same offer on one particular product, you can now create a targeted product offering to a sub-set of your customers: those likely to respond. Feeding back into the database the responses to these targeted campaigns, you can continue to refine the analysis and improve results even further.
#2 - Profile Your Customers
Many times, a sales representative will not only concentrate on higher-priced products; he or she will also focus on the one or two departments within an organization which needs those products. As a result, the sales personnel have little to no knowledge of the buyers and purchasing needs in other areas of the organization.
If this is true in your company, one very effective solution is to profile (or map) each customer’s organization to uncover and record details about outlying departments. This profiling discipline results in the capture of corporate DNA:
Decision-makers and influencers, their contact information and the purchase process within their department.
- Needs of the department as it relates to how they might use your products and services. This would include competitive products currently in use and their likes/dislikes related to those products.
- Activities currently underway or planned for the future related to making a change in purchasing patterns. This includes a change in suppliers, a first-time purchase of a product or buying an increased volume of the same.
This information needs to be captured and stored in a central location so it can be used for targeted and personalized marketing communications. If you combine this concept with the above-mentioned cross-sell models, you will have great success in changing the unbalanced mix in your product sales.
#3 - Sell Lower-End Products Through Inside Sales and Database Marketing
Instead of trying to manage and motivate your field sales organization to sell your complete product line, consider an alternative approach. If the price and sophistication of your portfolio lead field sales people to avoid certain products, they may be a perfect fit for an inside sales team. This dedicated inside sales team could conduct the profiling activities mentioned above while making outbound calls as part of an integrated marketing campaign to push your orphaned products. The key to cost control is avoiding the expense of contacting prospects unlikely to buy and pursuing effective retention strategies to retain the customers you have. This can be a particularly effective solution for small markets with limited demand, or where there is limited product line sales coverage.
Admittedly, this is not a new idea. Inside sales strategies are a common alternative for smaller accounts and smaller products. However, many of these attempts have failed in the past, in large part because they were a stand-alone solution — simply a cold-calling center, which is a sub-optimal approach. Potential clients need to be identified, understood, and marketed to in a very personal way, in conjunction with an inside sales person calling them to follow up on the marketing material. This approach has proven effective in many organizations.
#4 - Turn Traditional Cost Centers Into Sales & Marketing Channels
The suggestions mentioned above could be considered methods to optimize outbound sales and marketing campaigns to drive a desired mix of product revenues. This next area focuses on turning traditional support departments, such as customer service and billing, into sales and marketing channels.
Imagine that you have planned (based upon your analytical modeling) to cross-sell a particular product to a specific department within a targeted company and they have yet to respond to one of your outbound offers. If they happen to call your customer service department, why not make them the cross-sell offer at the end of the service call? This approach assumes that you have a CRM application loaded on each agent’s desktop and the application displays the marketing campaigns associated with an inbound call. A best practice of many world-class organizations is enabling personnel in disparate departments to see one another’s customer contacts.
In the above example, the customer service agent doesn’t need to be a skilled sales representative. Once armed with the appropriate marketing offer, the agent can advance the sale, and possibly close it.
The same idea could be implemented in the billing department. If cross-sell offers to specific clients are planned, and you are also sending them monthly or quarterly invoices for existing products/services, why not insert personalized offers into their statements? Ask your billing department and/or outsourced statement processing company if they have the technology to enable this idea.
It may take you, on average, five attempts to get someone to accept your marketing offer. What if your planned communications only account for four attempts? A customer service interaction or monthly statement reinforcing the outbound marketing offers may make the difference. There are significant costs associated with those functions today. Spending a little more money can turn them into departments that drive incremental revenue and balance the distribution in product contributions.
MMC is a sales optimization company, expert in working with manufacturing and distribution clients in the building products market to deliver profitable growth through programs that increase sales reach while lowering the overall cost of sales.
When deployed in concert with, or in place of a traditional field sales model, our methodology will increase the efficiency of acquisition, improve existing account performance, and reduce customer attrition.
About the Author
Product Director, Channel 80/20
John joined Modern Marketing Concepts in 2006 and has since specialized in developing and executing database marketing and sales programs to drive sales growth for his clients in building materials markets.
He currently oversees operations for various clients in building products distribution, working with his clients to build and launch programs to ensure growth in some of their most underserved customer segments.