How to use the Pareto principle to analyze customer concentration.
I recently helped a small business owner double their revenue by firing 80% of their customers.
Here’s how we did it.
The business is in the medical supply industry, distributing products like syringes, sterilizers, and scalpels to 6,000 customers across the U.S. They handle around 5,000 orders per year, with total revenue just under $4 million and an average order value of $800.
They employ 13 salespeople, which works out to 32 orders per month per salesperson, generating about $25,000 in monthly revenue per person.
At a quick glance, the business looked healthy, but behind the scenes, it was a different story. Managing thousands of customers created several major issues:
- Small orders barely covering processing costs
- High-maintenance clients demanding custom terms with little benefit
- An overwhelmed customer service team stretched too thin
Revenue was growing, but profits were flat because new customers increased operational costs without adding meaningful value.
We decided to take a deeper look at customer concentration, using the Pareto Principle.
Often, 80% of your revenue comes from 20% of your customers, meaning you could technically trim 80% of your customer portfolio and keep 80% of your revenue.
Here’s how to perform a Parety Analysis:
1.Gather every invoice from the past couple of years.
- If this is digitized - great, your job is easy. If it’s not - have fun spending the next couple of weeks buried in paperwork.
2. Create a spreadsheet with one row per invoice, including columns for customer name and order amount.
3. Pivot the data by customer, sorting from highest to lowest total order value.
4. For each customer, calculate their percentage of total revenue and add a cumulative percentage column.
You’ll end up with something like this:
Then, create a chart to illustrate the Pareto Distribution:
In this case, the top 20% of customers accounted for 70% of the revenue.
These were hospitals and large health clinics, often with automatic reordering and timely payments. They’d been long-term clients, making them reliable and easy to manage.
The “bad” customers were smaller, like independent tattoo studios and neighborhood clinics, who had been lured in by discounts. These clients were draining resources with minimal return.
The sales team had a similar imbalance. Four of the 13 salespeople had monopolized the high-value accounts, while the rest struggled with smaller, less profitable clients.
So, what did we end up doing?
Here’s the 4-step plan we implemented:
1. Stop wasting resources on small accounts with no growth potential—let them churn naturally.2. Politely part ways with the most demanding low-revenue clients, recommending other suppliers.
3. Research the top 20% of customers, define an Ideal Customer Profile (ICP), and focus on acquiring more clients like them.
4. Let go of the bottom 50% of the salesforce and train the remaining team on how to target high-value customers.
The results?
A few months later, revenue is up by 23%, and tracking to do +100% YoY. profitability has increased, and the business is running smoother. The sales team now focuses on targeting ideal customers in different regions.
I strongly recommend performing a Pareto Analysis on your customer base on a yearly basis. You might be able to fire 80% of your customers too!
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Different type of business, but at our swim school the customer service level of effort is a big factor. Some customers are just plain difficult and rude. We give our staff permission to “fire” them by kindly referring them to the competition down the street.
In our case and your example above, good to be aware of how much sales pipeline you might giving up by firing that customer.