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The 80/20 Rule And Your Target Market

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Remember the Pareto Principal? You probably know it as the 80/20 rule, or even the 70/30 principle.

It was developed over a hundred years ago by an Italian economist by the name of Vilfredo Pareto, who got the idea by observing the pea pods in his garden.

According to Pareto’s observations, income from clients is distributed in a logarithmic form, and many top advisors will suggest you sort your clients according to the amount of income they produce, and wean out the lower producing clients.

 

For example, if your fees from clients follows this distribution:

Many of those so called “consultants” encourage the weaning of the bottom twenty percent of your revenue producing clients as they are not generating enough gross revenue.

But, nothing is set in stone. It’s possible that your low fee clients are producing all of your profits and are supporting you, while your highest grossing revenue clients are demanding more of your time, and costing you money.

Your analysis could show:

In fact, the Pareto Principle only exists in the realm of a defined population, and for a defined relationship.

As competition grows and expands, competing economist Chris Anderson wrote in a 2004 “Wired” magazine article about the “Long Tail” where he discussed how the “Long Tail” of specialization can produce tremendous returns to individual practitioners, especially as the cost to a prospect of finding and locating relationships between client and practitioner are lowered.

As the cost is lowered, more and more prospects enter the market and the greater the ability of the practitioner to achieve premium or brand level pricing.

Right about now, you should be getting concerned that I’m leading you off on a wild goose chase, headed for some meaningless theoretical marketing ideology. Stay tuned and I’ll explain.

I know you’re a small local practitioner, and it’s impossible for you to be as spiffy and high-falutin’ as the boys and girls over at the “Big Four.” You can’t easily pick and choose your clients when you open your doors.

Of course, you want to, and need to, get to the point where you can, but for right now, you’ll be starting with a portfolio of services, some predictable offerings, others more specialized. The former pay for the practice’s daily bread and butter and fund your research into high growth specializations and niches.

More risky than pursuing specializations is not to pursue them, and condemn yourself to a lifetime of slave labor harvesting the slog of micro-opportunities rather than imagining, pursuing, and differentiating your practice so that you gain an effective slice of the “Long Tail.”

More risky than pursuing an accounting specialization is not to pursue one. Click To Tweet

The next few modules will help you define your market and refine your strategy, whether you have selected a niche focus strategy as suggested for an “A” or “Archer” market, a focused differentiation strategy as suggested for a “B,” or “Brander” market, a low cost leadership strategy as suggested for a “C,” or “Clumper” style market, or a generalized differentiation strategy for a “D,” Developer market.

In our next session, I am going to give you an LSRP Scoring worksheet, that will enable you to analyze your clients based on profitability (for a sole practitioner, you can simply look at earnings per hour as an indicator of profitability), services involved or provided, how long the account has used your services, and when they last made contact with you. If you don’t have any clients as yet, you’ll just make up examples so you can understand how to use the worksheet.

The idea for this worksheet is based on the old Direct Marketing calculation referred to as RFM, which stands for “Recency, Frequency, and Money.” I have adapted it for your practice as LSRP, which we will use to represent “Life, Services, Recency and Profit.

So, in our next session, I’ll show you how to calculate your LSRP score, and how it compares to Pareto’s “80/20 Rule” as a superior method for evaluating clients.

Join us here at Practice Builder Publishing and become a part of the community, whether you become a contributing author, a peer recruiter, or merely a raving devotee of the Practice Builder Publishing resources, I'll work with you personally so you can reach the goals you set.

Best to you and yours,

kirks-sig

 

Kirk

P.S. Think I'm full of B.S.? Maybe you ought to let me know what you think. Plop your comments in the section down below the related articles and let me know what you think.!

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I would love to see you become a part of the Practice Builder Publishing, and work with you personally to reach maximum profit potential this year! Nothing I teach or help you with damage your credibility. It will simply get you more clients and help you make more money.

If you stop searching for the next magic trick, the perfect software, the "shiny object" that's going to do all the work for you (note: it doesn't exist)- and just focus on building & serving your market - you'll actually start seeing GREAT results. FAST.

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