Business management thinker Joseph M. Juran suggested the 80/20 principle and named it after Italian economist Vilfredo Pareto, who observed in 1906 that 80% of the land in Italy was owned by 20% of the population. He developed the principle by observing that 20% of the pea pods in his garden contained 80% of the peas. It is a common rule of thumb in business that 80% of your income is generated by 20% of your clients.”
Quite frankly, I’m a believer in not painting with too broad a brush. There are always exceptions to the rule, except natural laws like gravity…the apple is going to fall. In my over 10 years of work consulting on thousands of insurance books, this theory has been dead on and applies to every seasoned book of 5 years or more.
( Exception: Homogeneous small program policies. i.e. retail maintenance insurance for appliances etc.)
Early in my career as an insurance producer, I applied this theory to my book as a method to help manage growth shortly after experiencing The Peter Principle -The principle that “in a hierarchy every employee tends to rise to his level of incompetence and stay there for the rest of their career” At approximately $600,000 in revenue, I had reached my level of incompetence, reached a plateau and couldn’t grow.
On the advice of a colleague, I applied the 80/20 rule to my book and discovered “surprise!” that 80% of my revenue came from 20% of my clients. I used this process along with others, and hurdled the million dollar barrier. Unexpectedly, I also experienced significant gains in time management, customer service and client retention on a much larger book. Don’t take my word for it. Prior to next Monday, apply this principal to any seasoned book in your agency.
Here’s how the process works:
Order a book run from largest to smallest client by revenue. Start with your largest client and total revenue until you reach 80% of the total book. Draw a line and add up the number of clients that represent 80% of your book revenue. I guarantee that the total number of clients who generate 80% of your income will be very close to 20%. Log on and give me your results.
Next month, we’ll discuss how to use this information and other processes to effectively mange and grow your book.