The Worst Business Proverb

by Steven Hourston on May 24, 2012

For any business owner or entrepreneur the worst proverb ever written is:

“Look after the pennies and the pounds will look after themselves.”

How many businesses struggle and how many hours are wasted because their owners focus on the wrong numbers?

In any business, there are only 4 questions about numbers that matter…

  1. What’s the biggest number?
  2. What’s the fastest growing number?
  3. Which big numbers are getting bigger?
  4. Which big numbers are getting smaller?

These questions should scrutinise Cash, Profits, Sales, Costs, Staff, Customers, Locations, Opportunities and Time.

Let’s bring this to life with a couple of examples

Every business has customers who are worth more than others.

Sometimes much more.

Graf Diamonds, a British company is preparing to list their shares on the Hong Kong stockmarket and they’ve revealed some interesting information about their customers.

Last year their sales were £404 million.

One customer spent £53 million or 13.2% of the total sales (I bet they were offered a small sherry or tea and biscuits while they shopped!)

Their 20 best customers spent £178 million between them, which added up to 44% of their sales.

Now we don’t all sell diamonds, but you will have some customers who are worth more than others.

More Customers

Sometimes much more.

You’ve probably heard of the Pareto’s 80-20 rule, but it’s much more revealing to look at a Pareto Curve.

Take your best customer and plot their value on a graph. Then add the value of your next best customer. Keep adding your customers in value order.

You’ll end up with a graph that looks something the one above.

Now it’s easy to find your biggest numbers, in this case with respect to your customers.

How much time do you spend with these customers?

  1. Who spends the most?
  2. Who’s spending is increasing the fastest
  3. Who’s spending more?
  4. Who’s spending less?
What can you do to encourage them to spend more, or to stop them spending less?

 

Are you distracted by these less profitable customers?

Be careful, because they’re sucking your time and energy away from your high profit customers. They will only become more profitable if:

  • any of them become high profit customers
  • you can encourage them to spend more

Should you stop serving some of these customers to free up time to attract and serve more profitable ones?

What about your time?

Do you spend most of your time on the big numbers? Or do you waste too much time on the little ones?

  1. How much of your time is spent on your biggest number?
  2. Do you quickly spot the fastest growing numbers in your business?
  3. How do you track if the big numbers are getting bigger?
  4. How do you spot which big numbers are getting smaller?

If you need to make a decision about pennies, spend only a minute or two. That’ll free up more time to invest in the big pounds.

Pennies = Minutes
Pounds = Hours

Apply these 4 crucial questions to scrutinise Cash, Profits, Sales, Costs, Staff, Customers, Locations, Opportunities and Time in your business. It’ll be time well spent.

We started with a terrible proverb, so let’s end with a better one:

“Don’t be penny wise and pound foolish.”

Steven Hourston can help you to attract more clients and more sales with transformational marketing. Click here to watch 4 Free videos and see how you can grow your sales and profits fast.

{ 3 comments… read them below or add one }

Oliver May 29, 2012 at 9:02 am

I try to remember to use the 80-20 rule but I’ve never seen a Pareto curve before. Your explanation with the dolls makes it easy to understand. It looks to be so much more precise than the 80-20 generalisation, you’re digging deeper which must be better. Thanks, you’ve set my agenda for the day.

Reply

Steven June 1, 2012 at 4:49 pm

Hi Oliver.

Isn’t the Pareto curve a revelation. I first saw it when I was working at Boots. We had shelves and shelves of stock, most of which sold pretty slowly. But the winners flew off the shelves – we made sure we never ran out of those.

Reply

Steven Hourston June 3, 2012 at 2:09 pm

@Oliver Hi Oliver.

Isn’t the Pareto curve a revelation. I first saw it when I was working at Boots. We had shelves and shelves of stock, most of which sold pretty slowly. But the winners flew off the shelves – we made sure we never ran out of those.

Reply

Leave a Comment

CommentLuv badge

{ 1 trackback }

Previous post:

Next post: