We frequently refer to the 80/20 Rule in Profit Savvy. It assumes you can spot the best and worse performers among your products, market, staff and customers. This article explains the simple methodology behind quickly allocating each candidate to a slot in the rankings chart. This Blue Belt
It doesn't matter whether you are looking at products, customers, staff or various markets on a geographical, demographic or channel (e.g. retail, online) basis. The method is always the same.
For this demonstration, let's assume we are selling widgets of various colors and we want to better understand the value each colour of widget contributes to the business.
Method
In a spreadsheet:
 List each of your product groups in column 1.
 Their sales income in column 2.
 Their purchase price in column 3.
 Known direct costs, like sales, in column 4.
 In the fifth column, calculate the profitability by the formula [sales income (2) minus purchase price (3) minus direct costs (4)] .
 In column six, put the profit returned for each product (column 5) divided by the total profit. This gives the share of the profit contributed by each product.
To see if you have this right, put $100 into the sales income, $50 into purchase cost, and $10 into direct costs. Column five will now have $100$50$10 giving $40. Column six will have $40/$100 giving 40%. See the table below for further examples.
Using the sorting facility in your spreadsheet, sort all your products by their return on sales, so that the highest returning group is at the top in the first line of your spreadsheet.
In column seven, put in a formula to calculate the cumulative amount of the sales for each of the products as they are listed. The cumulative amount is calculated as the sales of any particular row plus the sales of all the rows beforehand. The formula in row 1 of column 7 is taken from the top of column 6. In row 2 it is column 6 + the previous row in column 7; and so on
1 
2 
3 
4 
5 
6 
7 
Product 
Sales 
Purchase 
Direct 
Profit 
Return 
Cumulative 
Blue widgets 
100 
50 
10 
40 
50% 
50% 
Red widgets 
62 
20 
12 
30 
37% 
87% 
Yellow Widgets 
115 
80 
15 
20 
25% 
112% 
Brown widgets 
60 
50 
20 
10 
12% 
100% 
Total 



80 


In this example, we have intentionally put in a Brown Widget product that loses money. This might be more common than you think when you do finally break your products down this way.
Arranging your data this way will very quickly indicate where your 80/20 breakup is.
In this example it is roughly after the first two products in the table. Yellow widgets only contribute a quarter of your profit and brown widgets actually cost you money.
On face value, you would dump brown widgets and give serious thought to dumping yellow.
Alternatively, you could reduce the cost of poor performers, like our yellow widgets, by (for example) reducing their direct selling costs by only selling online rather than with a field sales force. Dropping selling costs, boosts profits and possibly puts it back in the top 20% of performers.
Pareto chart
If you are a spreadsheet virtuoso, you could actually graph this information in MS Excel's Pareto Chart option, which shows the products by their contribution to profitability on one axis and the cumulative figures on another axis. Pareto discovered the 80/20 Rule.
You can see how to do this in the YouTube video "Create a Pareto Chart".