Pareto's principle vs. "more is better" — Build your client base with persistenceArticle added by Ed Morrow on July 24, 2013
Ed Morrow

Ed Morrow

Middletown, OH

Joined: October 29, 2005

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In our haste to consider Pareto’s principle, better known as the 80-20 rule, we sometimes lose sight of a different maxim, which states simply that “more is better.”

Italian economist Vilfredo Pareto observed in 1906 that 80 percent of the land in Italy was owned by 20 percent of the population. Further research revealed that 20 percent of the pea pods in his garden contained 80 percent of the peas.

If 80 percent of the land was owned by only 20 percent of the people, it also meant that 80 percent of the people collectively owned only 20 percent of the property in Italy.

If 80 percent of the income was earned by only 20 percent of the people, it also meant that 80 percent of the people collectively earned only 20 percent of all earned income.

And if 80 percent of the money was saved by only 20 percent of the people, it also meant that 80 percent of the people collectively saved only 20 percent.

We might draw the conclusion that the disparity between the wealthy and the poor would increase. Judging by the number of unemployed, underemployed and those not even seeking employment, the number of those in financial distress within the U.S. is increasing. Will that eventually cause civic unrest? You decide!

Pareto went on to apply this principle to many aspects of business and sociology. In business, this is commonly referred to in many ways, such as, "80 percent of your sales come from 20 percent of your clients." In fact, we have come to believe that it is so universal that it should govern all business and professional decisions.

But how do we do that? The answer might be to change your client mix and increase the number of your "20-percent" clients — those who currently bring you the most business.

The 80-20 rule observes that most things have an unequal distribution. Out of five great ideas, perhaps one will be particularly novel and go on to influence a majority. We might prefer that every piece contributes equally, but that doesn’t always happen.

Of course, this ratio can change. It could be 80-20, 90-10 or something else. The key point is that most things are not 1 out of 1, where each unit of input (resources, time, labor) contributes exactly the same amount of output.
So, why is this useful?

The Pareto principle helps you realize that the majority of results come from a minority of inputs. Knowing this, you (or your clients) might decide to take action. Here are some examples on what kind of action to take:
  • Focus on rewarding the 20 percent of workers who contribute 80 percent of results.
  • Fix the 20 percent of computer bugs which contribute to 80 percent of crashes.
  • Focus on satisfying the 20 percent of customers who contribute 80 percent of the revenue.
  • Twenty percent of your customers are now highly profitable; shed those who are not.
The examples go on. The point is to realize that you can often focus your effort on the 20 percent that make a difference, instead of focusing on the 80 percent that don’t add much.

Pareto’s principle is often referred to as the law of diminishing returns. Each additional hour of effort, each extra worker is adding less to the final result. By the end, you are spending lots of time on the minor details.

But Pareto doesn’t control everything

Many financial consultants have relied on the 80-20 rule — and still do so — as they schedule seminars to acquire new clients. And the 80-20 rule seems to apply there.

One experienced planner told me about the recent seminars he had been holding. He was achieving the typical results. He used a respected marketing firm to conduct the mailings. They helped him select the demographics that fit his top-tier market, designed attractive offerings, helped him select a good venue and processed the calls for reservations with good results.

He sent his mailings to about 6,000 addresses that fit his criteria. He booked an excellent restaurant in a well-regarded hotel for two evenings, and the calls started coming in. (Here we are counting family units — some were single, some partnered and most were married.) Here were his results:
  • 60 expressed interest and registered (a 1 percent response)
  • 10 failed to show up and did not call
  • 50 showed up for the event
  • 10 scheduled an appointment (20 percent of 50 – Pareto’s Rule)
  • Eight of those appointments became clients (Pareto’s Rule in reverse)
  • 40 did not schedule an appointment
You might say that these were not good results. Only eight new clients out of 6,000 mailings? But he was delighted because his average income per client is over $16,000. He charges a plan fee and sells life insurance, annuities, a small bit of health insurance and some precious metals. He is not an RIA, but he refers clients to a qualified advisor with an RIA firm. He receives no fee from them, but they often refer customers to him for insurance.

His total cost was just over $10,000 for the mailings, the meals, the staff, the gifts and the handout folders. His income will match his average current new client revenue: $128,000 (8 x $16,000).

So, he is quite happy and feels good about the entire transaction. His costs were 8 percent to 10 percent of his revenue. Yes, it was a lot of work and planning. The consultant knows that if he isn’t adding new clients, the inevitable client losses due to death, disability, re-location and economic reversal will cause his firm’s net income to decline.
What is he missing?

He had 50 people who were interested in the topics expressed in his initial mailing but who did not schedule appointments. Some were not genuine prospects for his service. Some were distracted by ongoing family or business events. Some were slower to recognize the need for action. A lot of them were simply procrastinators.

This advisor does not believe in direct mail, which he perceives to be like the junk that is in his mailbox every day. He liked how classy the distributions appeared and felt that it contributed to his branding and image-building. So he was going to disregard the 50 “no appointments” and go on to the next seminar in a few months.

This advisor drives a very nice Mercedes. He was asked, “Did you buy the first car shown by the first dealer you visited?” He answered, “No, I looked at five or six brands of cars like Jaguar, BMW, Audi and Lexus and even went to two Mercedes dealers before I finally bought my car.”

He suddenly caught on. “You mean that I should not simply throw those 50 names away?” He went on to add, “But I don’t think many of them will retain my services; I don’t believe in sending some fancy over-sized postcards, and I am not going to call them.”

And he shouldn’t. What he needs to activate is "DRIP" marketing:
    D: Dramatic
    R: Response
    I: Important
    P: Personal
This aspect of marketing can be delegated to a staff person, and the results might be very significant. Suppose he starts to DRIP market to all 50 of those he has not personally had an appointment with. During the process, a few will express that they have absolutely no interest in his services. Maybe they were just interested in the free meal — what seminar presenters refer to as plate-lickers — or they did not match the demographics of his desired clients.

Let’s assume he uses a DRIP marketing sequence of 16 letters, 16 articles and three phone calls from his staff person (or even an off-site part-time employee). He will not have to send out 800 items (16 mailings to 50 persons). It is likely that his total will be about 500. These will cost about $2 each for postage, envelopes, letterhead and article paper. Total expense will be about $1,000 ($2 x 500 mailings).

Remember, the demographics (age, net worth and income) for this group are presumably the same as those who took the initiative to book an appointment at the end of his seminar.
  • A 20 percent response would be 10 new appointments and eight new clients.
  • That would be another $128,000 of income, doubling the initial response.
  • All of the DRIP marketing efforts could be delegated to a staff associate.
Did it work? Yes! His staff person actually booked 16 appointments, but the consultant netted only nine new clients. What if the results had been half of that? He might have only another four clients. If he only got two new clients from that group of 50, his payoff would be $32,000 for an investment of $1,000. Is that a good ROI?
What about class-two clients?

This financial consultant was seeking clients that fit the following criteria:
  • Age 60-75 years
  • Married (or partnered)
  • Retired or close to it
  • Investable net worth of $1 million
His personal planning had a major omission: no successor. While he enjoyed his practice, he knew that the clock was ticking for him as well as his clients. Because his practice was not based on AUM fees, he felt it would be difficult to sell. Furthermore, clients were all “like family” and he wasn’t comfortable selling them to a stranger.

He was making no efforts to establish the children of his current clients as prospects for his practice, because they could not make the same level of purchases. In fact he even discouraged anyone that he felt could not produce a first year income of at least $12,000.

Having a secondary marketing effort with DRIP marketing could attract those lesser clients. Some of them would grow financially and some would not. Others would inherit from his clients when they passed on and then fit his criteria.

He even had a lot of class-two and class-three clients who could be served by a junior associate, and he would be able to observe firsthand if this would be a logical successor. They were pleased with his prior services and would make more (but smaller) purchases — and certainly offer referrals. When he did ask for referrals (which was rare), he was seeking people who fit his four criteria. An up-and-coming professional would not fit him, but it would fit his new associate.

He has started searching for this junior associate, ideally a currently licensed agent associated with a “captive” company who is looking to move out. If this is not successful, he will call on the area universities that have a financial services curriculum.

Put Pareto to work for you

Don’t just blindly repeat the 80-20 rule and go on. Look at the 80 percent who did not respond immediately to your appointment offer. They might be worth even more to you than those who made immediate appointments. Many seminar attendees are intrigued but just do not move swiftly.

If your seminars (or other marketing efforts) only produce 20 percent client conversion, then look to the remaining 80 percent and put them into an automatic prospect-to-client marketing effort.

Remember, more is better! Seventeen clients is a lot better than just eight.
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