The 80/20 Rule — Apply it in Your Business
The 80/20 rule originated in 1906 from an Italian econo-mist named Vilfredo Pareto, who observed that 80 percent of the land in Italy was owned by 20 percent of the population. He then observed that 20 percent of the pea pods in his garden contained 80 percent of the peas. After seeing the same ratio in other situations, Pareto concluded that for many events about 80 percent of the effects come from 20 percent of the causes.
In today’s business world, the Pareto Principle (the 80/20 rule) applies in many ways. Here are a few examples, as reported in Wikipedia:
- 80 percent of your profits come from 20 percent of your customers
- 80 percent of your profits come from 20 percent of the time you spend
- 80 percent of healthcare resources are consumed by 20 percent of the patients
- 80 percent of crimes are committed by 20 percent of the criminals
- 80 percent of a company’s output is produced by 20 percent of its employees
The list goes on and on. So what does this rule have to do with detailing — or net profit?
Well, a properly managed detail business should maintain a net profit of at least 20 percent of gross profit, which means that the other 80 percent is eaten up by expenses — the 80/20 rule. Chances are, if you are operating a detail business and can make it with a 20 percent net profit, you are probably one of the top 20 percent of successful detail businesses in our industry.
In evaluating detail businesses, we find that at least 80 percent of those businesses are producing net profits below that 20 percent mark; the 80/20 rule once again.
Research indicates that most detail business owners do a reasonable job in controlling expenses but are doing a below average job in generating maximum gross profits for a number of reasons. So, how can the 80/20 rule help you make 2013 your best year ever?
First, if your expenses must be in line with industry guidelines, you cannot “save your way into more profit.” You can only cut costs so far, so let us focus on increasing sales and gross profits. Let us see how the 80/20 rule can positively affect profits in the following example of an average detail business.
If the sales advisor simply up-sold, say 200 customers an additional detail service, 20 percent of the customers would say “yes” and 80 percent would say “no” without any further selling or efforts to overcome objections. In other words, 20 percent of your customers will say “yes” if you just give them the opportunity. That equals 40 sales, which will produce substantial income per car. Say the up-sell averages $50 per car, which increases sales by about $2,000 a month. So at a 20 percent gross profit, that is an additional $400 a month. If you are profitable, then net profit will increase. If you are losing money, then you have taken a big step toward breaking even or making a profit.
Now, what do you think would happen in the above example if you or your sales advisor were properly train-ed on how to make a proper sales pitch to these same 200 customers to advise them of the benefits of properly taking care of their vehicle? The 80/20 rule will become the 60/40 rule with 40 up-sells producing another $2,000 per month totaling $24,000 per year. Now, if you are thinking all this is “fantasyland” then you are an underachiever. In most cases, a properly trained salesperson will outperform someone with no training. If you will properly train your sales advisors or yourself and hold yourself and them accountable for using the 80/20 rule with all customers, your net profits will soar.
The 80/20 rule exists in every detail business whether you believe it or not. Every one of you reading this article has the ability — as well as the opportunity — to improve. To do so, you must make a commitment to leave your comfort zone, to start doing some things differently as well as doing different things. For most of you, a net profit at 20 percent of gross profit will make 2013 your best year ever. For you top performers, who are already doing that, welcome to the Top 20 Percent Club of Detail Businesses.
Sharie Sipowicz is aftermarket sales manager with Detail Plus Car Appearance Systems Inc. She has been involved in the detail industry for over 20 years, both as a vendor of products and equipment and as a hands-on operator in a retail detail environment. You can contact Sharie at firstname.lastname@example.org.