Following the 80/20 Rule

There is a well-known principle called the 80-20 Rule (aka Pareto Principle). It depicts that 80% of outcomes are driven by 20% of causes. When we take that principle into observation for retail sales, it remarkably applies.

In general, most retailers see 80% of their stores’ revenue driven by 20% of their products. What does this mean and how you can use this theory for increased sales?

Let’s observe how it applies in your retail store. Take last year’s numbers to get an accurate full-year report. This can also be done seasonally as needed.

First, review your “by item” sales reports to see what items your top performers by revenue are.

Second, if you have a total of 100 SKUs, you will take the top 20 items. You can scale up as high as needed following the 20/100 ratio. For example, if you have 500 SKUs, you’d pull up the top 100 items; 1,000 SKUs, you’d pull up the top 200 items; 2,500 SKUs, you’d pull up the top 500 items, and so on.

Third, add up the total revenue for the top 20% of your items.

Fourth, separately multiply your total stores’ sales by 0.8 to determine what 80% of your total sales are.

Fifth, compare the two figures to see how close you are.

NOW WHAT?

To take this vital information and put it to best use, we focus on the top 20% revenue producing products. Let’s call them key items.

• Are these key items in the right place in your store?

• Are they on featured walls? Easily accessible? Visible?

• Am I giving these key items ample space in my store?

• Do I always have proper stock levels of these key items?

• Are there additional colors, sizes or variations that I can bring in to help drive these key item sales even more?

The key takeaway is that we don’t have to be over-assorted, we just need to be properly assorted. Focusing on key items that produce most of your revenue, is a tried-and-true strategy that works!

BY TOM BORG