Managed Services Providers Can Profit by Using the Pareto Principle

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Managed Service Providers (MSPs) can exploit classical management tools such as the Pareto Principle to boost sales and profitability. Technology, such as customer relationship management systems (CRM) and configure-price-quote (CPQ) software, can help.

Perhaps the single biggest difference between sales and marketing, today versus 20 years ago, is the vast amount of data that managers have at their disposal.

This data is valuable, as the raw material needed for analysis on support of better decision-making. However, the vast volume of this data can make it tough for managers to isolate the useful from the useless.

If you’ve spent any time in management, problem-solving or certainly B-school, chances are you’ve been introduced to the Pareto Principle.

The Pareto Principle is a valuable tool for managers to use to attain more effective results from effort expended by identifying the most productive efforts and concentrating or emphasizing them over less-productive efforts. Pareto suggests it is typical for 80 percent of effect to come from 20 percent of possible causes.

Extending the Pareto Principle to the real world, 20 percent of your products would account for 80 percent of your profits, and 20 percent of your sales force would drive 80 percent of your sales. This might also suggest that 80 percent of time spent might be more wisely spent doing something else.

The 80/20 “Rule”

The Pareto Principle is also commonly known as the 80/20 rule. “Rule” is probably not a good word to use for Pareto. Care must be taken to remember that the 80/20 ratio may be typical, but not necessarily universal.

Neil Patel, writing for Entrepreneur Magazine cautions us, “As pervasive as the Pareto Principle may seem, however, it’s not a magic trick. It’s a principle, not an inviolable law of the universe. More precisely, it’s a trend … .”

Applying the Pareto Principle to Sales and Marketing

For selling organizations, the Pareto Principle offers great potential for informing selling and marketing decision-making.

All of those tough decisions to be made that will form the basis of an operational plan for a campaign or business year can benefit from Pareto.

Who will you sell to? What type of markets offer your highest chance for success? What SIC codes, company sizes and market verticals are you thriving in? Where do you not perform so well?

The 80/20 ratio can be a guide for making those market and audience decisions. CRM systems can be useful in helping you isolate this data.

How about product development? Are you throwing away money developing or improving a loser product, or are you bolstering the success of a proven product?

Activities, such as content development, keyword selection, collateral formats and social activities can also be informed through the application of the Pareto Principle to supporting data.

Marketing automation systems facilitate the use of all these processes, and adding Pareto as a metric or control is a logical extension of the evaluation process associated with electing these choices.

Selection of potential sales reps can be aided by identifying specific traits and experience factors common to your most successful sales reps. Learning how to exploit those commonalities still requires training and coaching skills, but Pareto can help you identify what to look for.

HR systems, especially those associated with recruitment, can be supported with data analyzed in light of the 80/20 relationship.

The Pareto Principle for MSPs

Market and Solution Emphasis

MSPs offer service levels ranging from highly specific to more generalized descriptions. An MSP might offer payroll services to small businesses, or they may offer generalized IT services for medium-size medical clinics. They also likely offer an assortment of solutions that falls between those two extremes.

That represents a huge range of expertise, knowledge and capability. Businesses and reps love to have a lot of arrows in the quiver, but managers know that for each arrow, there has to be considerable investment and expense.

Maintaining capabilities that are not profitable or marginally profitable are only useful if participation in that market delivers some level of credibility to the business that would otherwise not exist.

Seeking out that golden 20 percent of your customer base that delivers 80 percent of your profit is an activity worth pursuing. CRM and CPQ can link up solution with customer type and help inform market-emphasis decisions.

Cross- and Upselling Potential

Everyone knows that the easiest, least-expensive sales tend to be with established customers. MSPs are not excepted from that rule.

Analyzing what specific services are under contract by individual customers, based on the customer’s marketing demographic information, can quickly identify potential sales opportunities for add-on or upsales.

Similarly, finding additional opportunities within large customer organizations can be accomplished through the identification of services provided to specific customer types, meaning those with large internal parallel organizations that would represent new opportunities.

Again, a CRM system can identify customers within specified demographics, and CPQ software can identify functional holes in existing customers’ product suites. Additionally the same process can identify lines of business and locations not currently served by your company.

Sales Candidate Selection

Almost all sales organizations have their “stars” or those sales reps that always make their numbers and get the job done. Pareto can be applied to sales reps as well. Personally, I worked for a company that identified its high-performance sales club as the 80/20 club.

What do those individual sales reps have in common? What factors make them winners year after year?

Is it something easily identified such as education emphasis or industry experience? Or is it something more esoteric or subjective such as personality type or behavior?

Quantifying what commonalities are there for your 20 “percenters”, and applying those to metrics used to evaluate candidates for future positions will improve your rate in terms of hiring winners.

This doesn’t mean you are going to turn out the sales equivalent of the Stepford Wives, but it will ensure that you have better information to work with during candidate interviews and selection processes.

The Pareto Principle is not magic; it is simply a ruler or measure that shows us where to draw our lines. Those lines can separate acceptable from superlative, or good from average. It’s also not going to always be 80/20. You may have 60/40 going for you or any ratio.

The key is finding out what causes make for the best effects and how we can isolate those for the benefit of future decisions and actions.

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