The 80/20 rule is a simple yet powerful concept in business, positing that 80% of profits come from just 20% of products, services, or customer segments.
Applying this principle to business analytics can help leaders identify the key drivers of value, performance, and growth within their operations, and direct their resources to growing them.
How applying 80/20 can help you unlock profit potential
What is 80/20 in business analysis?
“In essence, an 80/20 analysis allows you to identify and focus on the profitable core of your business. It's about creating clarity around what drives profitability across your organization,” explains Cedar Cove, Senior Consultant, Value Creation & Analytics.
Once you pinpoint the profitable core of your business, you can strategically focus your resources and efforts on those high-value areas.
Understanding and harnessing the power of the 80/20 principle can lead to transformative business outcomes, including:
5 common business challenges 80/20 can help you solve
If you’ve ever asked yourself any of the questions below, it’s a clear sign that 80/20 analytics should be your next strategic move to uncover data-backed insights and guide your business strategy.
Business complexity often naturally arises as a company grows. This is where an 80/20 analysis can help you.
“When we perform an 80/20 analysis through the lens of reducing complexity, we look at which products, services, and customers are driving business value, and which are not,” Cove says. “That’s how we help businesses simplify: we help our clients shift resources away from non-strategic, low-value segments to focus on strategic, high-value segments.”
Reducing complexity can have a profound and positive impact on your business. It's about focusing on what truly drives value and helps you reach your goals more efficiently.
The 80/20 advantage:
Our team worked with a Canadian furniture manufacturer that was striving to expand its operations, but its growth potential was hampered by product complexity.
We conducted a comprehensive 80/20 financial and operational assessment to identify performance improvement opportunities and developed a strategic roadmap to enable the company to double in size while increasing its overall gross margin. We evaluated options to support its growth trajectory, including retail network expansion and customer-product portfolio optimization. Through a more tactical and operational analysis, we identified performance improvement opportunities amounting to $5 million in bottom-line profits.
“Once you dissect what is contributing to margin fluctuations, you will be better equipped to proactively respond to rising costs with minimal business disruption,” Cove says.
Moreover, understanding your top-performing products or customer segments can guide your allocation of promotional investments, leading to optimized returns on investment.
“What we find is that many businesses assume a product segment is profitable by looking at gross margins—but what often happens is that there are hidden costs to sell that, once factored in, can reveal that these segments actually have negative profitability,” Cove says. “Due to the need to collaborate across functions and aggregate data from various systems, many companies do not have this type of reporting readily available.”
“Once you understand the true profitability of your products and customers with 80/20, you can align your sales, marketing, operations, and finance teams to the same strategic objectives, such as driving bottom line growth,” says Charlotte Zhen, Senior Manager, Value Creation & Analytics. “It's also about stitching together various sources of data, owned by various functions, in the same report so that everyone has a clear, common view on performance.”
The 80/20 advantage:
Sales teams are usually compensated or measured based on top-line revenue, but often, once you look at the bottom-line contribution, it tells a different story.
One company our team worked with had exemplary top-line sales, but what leadership didn’t realize—and what our 80/20 analysis showed—is that they were actually making many of their sales at a loss, resulting in stagnant bottom-line profits.
"Once you get a granular view on profitability, you can get insights into hidden discrepancies and cost factors that may have been previously overlooked,” Cove says.
“What often happens within a business is that the finance department sees a certain set of metrics, while operations sees something different, and the sales team has another set of objectives,” adds Zhen. “Decisions are often made in isolation, creating internal inefficiencies and making it more difficult to drive bottom-line growth. A data-driven single source of the truth allows all stakeholders to work towards a common goal."
"Instead of pursuing a broad growth strategy where you're pushing all products to all customers, 80/20 allows you to create targeted growth strategies by understanding the nature of your relationships with customers and the implications to pricing and margin management. The analysis can also help to identify whitespaces and opportunities for upsell,” says Cove.
The 80/20 advantage:
A large Canadian construction company was hoping to leverage analytics to gain visibility into its project-level profitability.
Our team conducted an in-depth historical data analysis of the company’s past projects to assess project profitability and diagnose drivers of profitability. We uncovered trends and insights related to how the company should adapt its costing methodologies, pricing, and overarching strategy. This was synthesized into an action plan that outlined key initiatives to drive profitable growth.
Is it time for your business to embrace 80/20?
An 80/20 analysis can be performed on any business, regardless of size, industry, or niche—but businesses with a high degree of complexity and variety in their offerings are the ones to benefit the most.
“If you have limited resources that you want to reallocate to what is truly profitable and central to your business, an 80/20 analysis can provide clear guidance on how to do that,” says Cove. “It uncovers how to create capacity for growth through allocating resources more efficiently."
It also directly applies to businesses that are pursuing growth. Instead of relentlessly aiming to push forward a long list of growth initiatives, 80/20 encourages leaders to focus on what matters most, enabling a practical realization of results.
Stagnating bottom-line growth is another indication that an 80/20 analysis might be beneficial.
Our approach: Data-centric, hands-on, and tailored to your goals
Our approach to 80/20 analysis is rooted in a data-centric methodology and led by a dedicated team of data scientists, strategists, and operations professionals. We leverage our proprietary platform for profitability analytics and work closely with our clients to tailor the results to their goals and needs.
Our team creates bespoke, interactive dashboards tailored to your organization's needs, empowering you to easily monitor and analyze profitability drivers in real time after the end of the engagement.
"Our bespoke dashboards are customized to the nature of each of our clients’ businesses. We help them work with the sales, operations, and other teams cross-functionally to identify practical and actionable recommendations,” Zhen says.
We have a dedicated team of data scientists with specialized capabilities who can leverage data to uncover hidden product, service, and customer-level profitability insights by combining unique data sets into a user-friendly dashboard.
Through our 80/20 engagements, we work collaboratively with key stakeholders across your organization to translate analytical insights into practical initiatives. We work with our clients to ensure continued access to the dashboard and promote use of the tool on a day-to-day basis.
"It's not just analytics—it's about translating the insights into an action plan that delivers results,” notes Zhen.