The 80/20 Engine: Where Your Profit Actually Lives

Bill Canady: Rank customers by profit contribution and split from A to B. Sort products into a core and a tell and let the operator make that call, not a spreadsheet, because core is a judgment about where your business is built to do, not a percentile. Then put every transaction in its box and total the four boxes on two dimensions, right? Percentage of revenue and percentage of profit. That's the deliverable. Four boxes, two numbers each, fixed on an index card. Simple. Not always easy to get it. But you can do it. And it will be the most valuable index card in the building. Three warnings here because I've watched them all three ruin the work. One, don't do it at the account name level. If you grade whole customers instead of transactions, you'll lose Quad 2 entirely. And quad two is the cheapest growth you own. Big customers buy tail products too. Small customers buy core. Everybody does the things you want them to do and the things you don't want them to do. They're complete. They're not just some. Simple one dimension. The analysis only works at the transaction level, which is precisely why the account name shortcut is so tempting. It's much faster and it gives you an answer that feels right and is totally wrong. Two, don't let sales grade their own customers. You cannot ask the line to grade the antelope. Every account will come back strategic. Everyone will have a reason. Long relationship. It's going to grow next year. Heard that's going to be a rocket ship. It gets us into a vertical. The parent company is enormous. Grade the accounts on the data first in a room without the account owners in it, and then bring in sales to challenge specific cases with evidence. The order matters. Data first, argument second, and the argument has to move a number to win. It's going to be hard. These guys are sales folks. They're good at it. They're going to convince you. Resist. Resist. Three, don't stop at the chart, right? This is the most common failure and the most expensive one. The analysis gets built. It's genuinely good. It gets presented to the leadership team. Everyone agrees. It's illuminating. And then it becomes a document. Six weeks later, it's in a folder, and the business was running exactly as it was running before. Shocker. The chart's not the deliverable. The decision is nothing has happened until a price has been moved, the account's been returned, or a product has been retired. Getting it on page means nothing. It is a start, though. Move three, ask the question out loud. Next leadership meeting. Go around the table. The exact wording again. What percentage of your function's productive time in a typical week is consumed by activities related to the bottom 20% of our customers? Sounds familiar, doesn't it? The number from each person, write it down in front of them with their name next to them. Do this even though the data isn't back yet. Especially because the data's not back yet. You want their estimates uncontaminated by the analysis so that when the analysis lands and it agrees with them, they own both. All right, what it looks like when it's working and when it's theater. When it's working, the language in the building changes and you find out about it secondhand. Someone in pricing conversation says, Well, that's a quad for a quarter. And everybody in the room knows exactly what that means and what happens next. The quad map gets updated quarterly without you asking. And your top 10 profit accounts start appearing on senior calendars on purpose, unprompted. That's when it's theater, the analysis is impeccable and nothing moves. There's a steering committee. There's a phase two. The word segmentation appears in three decks, and revenue is exactly where it was, which is people will describe as encouraging. At least they're putting something down on the page, even though they're not doing it. Here's the tell I used. 90 days after the analysis land, one question, ask it. What revenue have we walked away from? If the answer is none, didn't do the work. He did the reading. The number, three things worth keeping from this one. One, the top 20, the 25% of your customers produce 105 to 150% of your profit. I can just guarantee you that. You'll go through and do the work, or you can believe me, it doesn't matter. You'll find out. And the reason that it exceeds 100% is the bottom is. Negative. Because your PL is what it is. If one's overproducing, something's got to be taking it away. Your PL is an average, and the average is hiding two businesses that need two completely different management systems. Two, get the four quads. Quad one, the core, protect and grow, protect the fort. Nearly all the profit lives there. Quad two, cross-sell the core. And it's the cheapest growth you own. Get them to buy the stuff you like, stuff you can make and make money at. Quad three, graduated or hold. These are the ones you're going to automate. They're small. They buy stuff you like. Get them to buy more stuff of that. Let them self-serve. Quad four, reprice or exit. Firing or reprice quad four feels like losing revenue. It's not. It's about 4%. You could lose it, but typically because your people have time, they can go serve the best customers that you're making money. That revenue is consuming a third of your capacity in most of the complaints to earn it, almost nothing. So Three, occupied is not available. A manager spending thirty percent of her week on a bottom quartile account is not thirty percent available to you. She's thirty percent occupied, and that capacity does not come free until someone, most likely you, makes a decision that releases it. Free at first, then reallocate. Otherwise you'll burn folks out. And the one question which costs you nothing and eleven minutes, what percentage of your function's productive time? In a typical week is consumed by activities related to the bottom 20% of customers. Ask it this week. Write the numbers down. When the lowest answer in your room comes back at 18%, you'll understand why your leadership team is exhausted and your EVA dodge flat at the same time. These two facts will finally be the same fact. Luck is the residual to design. This is where you find out what you design. Next time is the one I'd pick. If you only listen to a single episode this season, it's a ratio. Two lines off your own PL, about thirty minutes of arithmetic. Ooh, math. And it returns one verdict whether your company has earned the right to grow at all. Or whether growth right now would make you a bigger, busier, and poorer. That's a threshold number. I'll give it to you. And most middle market businesses I've measure come in under it the first time. If you want the quad map template and capacity diagnosis in the 8020 Institute, always welcome to sign up. Come on, you can learn more, it'll be good for you. I'm Bill Kennedy. I'll see you in the next hundred days. Take care. You've been listening to the 1000-day CEO with Bill Kennedy. Follow the show for more decisive leadership, sustainable growth, and strategies that build enduring businesses. Until next time, make every day count.