20-225% rule

The 20-225% rule states that typically 20% of the customers account for 225% of the profits (or value added)

URL

http://www.virtual.co.nz/index.php/StrategicSnippets/WouldThe20-225RuleMakeYouMoreEffective

Description

Recent research has shown that once the full cost of supporting customers is taken into account, the majority of customers (usually around 80%) are not profitable at all. In fact studies carried out by Professors Cooper and Kaplan at the Harvard Business School have led them to the so called “20 - 225 rule". It applies equally to both private sector and public sector organisations.

The Rule states that typically 20% of the customers account for 225% of the profits (or value added), which of course means that the other 80% “lose” 125 percent of the profits (or value added).

It also says that typically 20% of the products (or services) account for 225% of the profits (or value added), which of course means that the other 80% “lose” 125 percent of the profits (or value added).

This is dangerous, not only because we end up supporting many customers and products which lose us money, but equally dangerously, we don't support as well as we should, the 20% that REALLY matter.