The short answer
Eighty-twenty has been ruined by repetition. Most operators hear it as “focus on what matters,” which is not a principle — it is a greeting card. Nobody has ever walked out of a meeting, focused on what matters, and gained a point of margin.
The 80/20 Engine is a diagnostic, not a slogan. It is a measurement you run on your own transaction data, and it answers one question: which specific customers buying which specific products generate the profit in your business, and which ones consume it.
The finding is consistent. In a typical middle-market business the top 20–25% of customers produce 105–150% of the profit. The only way part of a business can produce more than all of its profit is if the rest of it produces negative profit. Meanwhile the bottom 20% of customers account for roughly 5% of revenue, 30% of capacity, and 60% of complaints.
None of this appears on your P&L, because a P&L is an average — cut by entity, plant, region, or function. Profit does not live in a function. Profit lives at the intersection of a specific customer buying a specific product, and there is almost certainly no report on your desk cut that way.
Cross customers (A vs. B) against products (core vs. tail) and every revenue dollar lands in one of four quads: Quad 1 protect and grow, Quad 2 cross-sell the core, Quad 3 graduate or hold, Quad 4 re-price or exit.
And one rule governs whether any of it turns into money: occupied is not available. Capacity has to be released by a decision before it can be reallocated.
What did one question reveal about a $310 million company?
Second-floor conference room. Power Band Parts. Three hundred and ten million dollars of revenue, thirty-two percent gross margin, eight percent EBITDA. Seven function heads around the table — all competent, all tired, all holding a binder they had spent the weekend preparing that nobody had asked for.
The question was not about the binders. It was this: what percentage of your function’s productive time, in a typical week, is consumed by activities related to the bottom twenty percent of our customers?
Silence. Then the kind of shifting that happens when people realize the question is real.
Engineering went first: nineteen percent. Special drawings, one-off tolerances, quotes that never convert. Finance said twenty-two — collections, credit exceptions, disputed invoices, the manual work of billing people who pay in ninety-one days. Operations scheduling said twenty-eight: expedites, changeovers, short runs. The head of customer service said forty-one percent — not apologetically, but the way you say a number you have been carrying around waiting for somebody to ask.
Lowest answer in the room was eighteen. Highest was forty-one. The average across every function was about twenty-seven percent.
Then the CFO — a good CFO, quiet the whole meeting — looked up from his laptop and said: “Those customers are about five percent of revenue.”
Twenty-seven percent of the company. Five percent of the revenue.
Nobody in that room was underperforming. They were working extremely hard on the wrong third of the business, and not one report they received every month would ever have told them so.
Why doesn’t the 80/20 finding show up on your P&L?
Because your P&L is an average, and it is organized around the wrong thing.
Look at how the financials get cut. By legal entity. By plant. By region. By function — sales cost here, engineering cost there, operations at the bottom. Every one of those cuts is useful for something. Not one of them shows you profit.
Profit does not live in a function or a plant or a region. Profit lives at the intersection of a specific customer buying a specific product. That is the atomic unit, and there is almost certainly no report on your desk, in any month, that shows the business cut that way.
Which means the number you are managing to — thirty-two percent gross margin, eight percent EBITDA — is a blend. And the blend has two entirely different businesses inside it.
One is excellent: concentrated customers, core products, high margin, low touch, predictable. If you owned only that business you would be at fifteen or eighteen percent EBITDA and the sponsor would be delighted. The other loses money on nearly every transaction, is bolted to the first one, and consumes the first one’s capacity to do it. Average them together and you get eight percent EBITDA and a board asking, reasonably, why it isn’t twelve.
There is also a version of this that costs you when nothing goes wrong at all. Two customers, same revenue, same product, same price. One orders twelve times a year in full pallets and pays in thirty days. The other orders a hundred and forty times a year in singles, calls before each one, changes half of them after release, and pays in eighty. Your P&L charges both the same cost of goods and the same allocated overhead — because that is what allocation does. It spreads cost by revenue, which is precisely the assumption this entire exercise exists to break.
And when the analysis is actually run on real data at a real company, the ratio is usually sharper than eighty-twenty. In the businesses I have done this in, it lands closer to fifteen or twenty percent of inputs producing eighty percent of the profit.
What is the real cost of not knowing?
It is not only the money lost on bad transactions, although that is real. The larger cost is that you allocate management attention evenly across a business where profit is distributed wildly unevenly.
Your best customers — the ones producing more than a hundred percent of your profit — get a quarterly check-in and a Christmas card. Your worst customers get more service than that, because they complain more, and complaints route to attention. You have built, without ever deciding to, a system that spends the most on the accounts that pay the least.
Then there is the cost in days. This work belongs in the front of the hold for a reason. You have just come out of Meeting One with a goal. Meeting Two — set the strategy — is due within weeks, and strategy is a decision about where you will and will not compete. You cannot make that decision honestly without this analysis in your hand. Do it in the wrong order and you will set a strategy on top of the same averages that got you here.
And one more reason people skip it, said plainly: the answer is uncomfortable. It implicates the sales organization. It frequently implicates a logo the company is proud of. And once in a while it implicates a customer the CEO personally brought in. That is the real reason this analysis doesn’t get run, and it is not a data problem.
What does the profit curve actually look like?
Before naming the boxes, run the curve, because seeing the shape is what makes the boxes obvious.
Take your customers, sorted best to worst on profit, and add them up cumulatively.
The line climbs steeply through the first quintile. By the time you are through the top twenty or twenty-five percent of accounts you are already above a hundred percent of the profit the company earned that year. Then the line goes flat for a long stretch — that is the middle of your book, the accounts that essentially cover their own cost and nothing else. Then, in the last stretch, it turns down and gives back somewhere between five and thirty percent of what you made.
That downturn at the end is not a rounding error and it is not a data problem. It is a portion of your business you are paying to keep. Every business I have run this on has that shape. Yours will too.
What are the four quads, and what action belongs to each?
Two axes. On one, customers ranked by profit contribution — not revenue — split into A (roughly the top quintile or two, the ones producing that 105–150%) and B (everybody else). On the other, products sorted by strategic fit: core (what you are actually built to make, where you have cost advantage, where volume runs) and tail (the accumulated inventory of everything you have ever agreed to make for somebody once).
Cross them and every dollar of revenue falls into exactly one of four boxes.
Quad 1. The core. A-customers buying core products. This is where nearly all of the profit lives — not most, nearly all. In some businesses I have measured, Quad 1 is under a quarter of the revenue and more than the entirety of the profit.
The action is protect and grow, and “protect” is the word people skip. Quad 1 is where your competitors’ best salespeople spend their time. It is also, almost universally, the most under-serviced part of the business, because these accounts don’t complain — they are easy, they pay on time, and easy customers are invisible in a management system that routes attention toward noise. Ask when your top ten profit accounts last got an unprompted visit from anyone senior. In most companies the honest answer is that they didn’t, and the accounts screaming at you last week did.
Quad 2. Develop. A-customers buying tail products. Good customers — proven, creditworthy, already buying from you — buying the wrong things from you.
The action is cross-sell the core. This is the cheapest growth available to any middle-market business, and almost nobody works it systematically, because sales compensation pays the same for a dollar of tail as a dollar of core. Quad 2 is a list of names you already have, with a relationship you already own, and the entire move is changing the mix of what they buy.
Quad 3. Earn. B-customers buying core products. They are buying the right things. They are just small, or new, or lower-margin because of how they were priced on the way in.
The action is graduate or hold. Some are next year’s A-customers and should be worked deliberately toward that. The rest are fine as they are — serve them efficiently, at standard terms, at standard price, with no special handling, and don’t spend management attention trying to make them into something they aren’t.
Quad 4. The tail. B-customers buying tail products. Small, low-value customers buying small, low-value, non-core products. This is the complexity tax. This is where profit goes to die.
The action is re-price or exit. And here is the single point in the episode where people flinch: firing or re-pricing Quad 4 feels like losing revenue. It isn’t. That revenue is consuming a third of your capacity and most of your complaints to earn almost nothing.
Somebody in your room will say “but that’s still four million dollars of revenue.” They will be right about the four million and wrong about what it is. That four percent isn’t the cost. The four percent is the bait — it is what keeps you paying for a cost structure sized for a company you don’t want to be.
What is the capacity diagnostic question?
If you take one thing out of this episode, take this. It costs nothing, it takes about eleven minutes, and it works before you have a single line of data.
In your next leadership meeting, go around the table, one function head at a time, and ask each of them, in these words:
What percentage of your function’s productive time, in a typical week, is consumed by activities related to the bottom twenty percent of our customers?
Then do two things. Make them answer with a number, not a sentence. And write down what each one says, with their name next to it, in front of them.
At Power Band Parts the answers were: operations scheduling twenty-eight percent, finance twenty-two, engineering nineteen, customer service forty-one. Lowest eighteen, highest forty-one, average about twenty-seven. The sales number was its own conversation — roughly a third of field-sales time, the most expensive selling hours in the company, was going to accounts that produced almost nothing. Not because those salespeople were lazy: small accounts need more help per order, territories were built by geography rather than by value, and every rep was doing exactly what the system asked.
Somebody always says the estimates are soft. They are — these are guesses, off by a few points either way. It does not matter. Nobody guesses twenty-seven when the truth is four. The direction and the magnitude are what you need, and you got them in eleven minutes for free.
There is a second thing that happens in that room worth as much as the number. Once the head of engineering says nineteen percent out loud, in front of his peers, with the CEO writing it down, the analysis you are about to run stops being an attack on the sales organization. It is everybody’s number now. You will not have to convince that room of anything three weeks from now.
Why is occupied capacity not available capacity?
This is the piece that determines whether any of this turns into money.
Say your VP of Quality tells you she spends thirty percent of her week on bottom-quintile accounts. The instinct is to think: excellent, I have thirty percent of a Quality VP available to redeploy.
You don’t. She is not thirty percent available. She is thirty percent occupied.
That is not word games. It is the difference between a plan that works and a plan that produces exhaustion. Occupied capacity has to be released by a decision before it can be reallocated. Somebody has to raise a price, set a minimum order value, move an account to a distributor, or say no to a customer. Until one of those decisions is made and holds, the thirty percent is spoken for, and any new initiative you put on her plate goes on top of it.
This is where most eighty-twenty programs die, and they die quietly. The analysis is right, the deck is good, the growth initiatives get assigned — and nothing gets removed. Six months later the leadership team is doing everything it was doing before, plus a growth agenda, and the CEO cannot understand why a team this strong is moving this slowly.
Free first. Then reallocate. In that order, every time.
How do you actually run this? Three moves.
Move one. Pull the twelve-month transaction file. One file. Four columns minimum: customer, product, revenue, margin. Line-item level. Twelve months, so seasonality doesn’t distort it.
Ask your CFO directly and give the specification out loud, because the request will get interpreted otherwise. What you want is the raw transaction extract, not a summary. And here is the instruction that matters most, which you must give explicitly or you will not get it: do not clean it.
Somebody in Finance will want to make it presentable first — resolve the duplicate customer names, drop the rows with odd product codes, exclude the returns, net out intercompany, take out “the weird stuff.” Every one of those is a well-intentioned professional instinct, and every one removes exactly the mess you are trying to see. The weird stuff is the finding. A file cleaned into a tidy shape is a file that has had the answer scrubbed out of it. Raw extract, twelve months, four columns, one file, this week. You would rather have it ugly on Friday than beautiful in a month.
Move two. Build the quad map. Rank customers by profit contribution and split A from B. Sort products into core and tail — and let an operator make that call, not a spreadsheet, because “core” is a judgment about what your business is built to do, not a percentile. Then put every transaction in its box and total the four boxes on two dimensions: percentage of revenue and percentage of profit.
That is the deliverable. Four boxes, two numbers each. It fits on an index card, and it will be the most valuable index card in your building.
Move three. Ask the question out loud. Next leadership meeting. Around the table. A number from each person, written down in front of them with their name next to it. Do this even though the data isn’t back yet — especially because it isn’t back yet. You want their estimates uncontaminated by the analysis, so that when the analysis lands and agrees with them, they own both.
What are the three ways this analysis gets ruined?
One. Don’t do it at the account-name level. Grade whole customers instead of transactions and you lose Quad 2 entirely — and Quad 2 is the cheapest growth you own. Big customers buy tail products too. Small customers buy core. The analysis only works at the transaction level, which is precisely why the account-name shortcut is so tempting: it is much faster, and it gives you an answer that feels right and is wrong.
Two. Don’t let sales grade their own customers. You cannot ask the lion to guard the antelope. Every account comes back strategic, and every one has a reason — long relationship, growing next year, gets us into a vertical, the parent company is enormous. Grade the accounts on the data first, in a room without the account owners, then bring sales in to challenge specific cases with evidence. Data first, argument second, and the argument has to move a number to win.
Three. Don’t stop at the chart. This is the most common failure and the most expensive. The analysis gets built, it is genuinely good, it gets presented, everybody agrees it is illuminating — and then it becomes a document. Six weeks later it is in a folder and the business runs exactly as it did.
The chart is not the deliverable. The decision is. Nothing has happened until a price has moved, an account has been re-termed, or a product has been retired.
What does it look like when it’s working, and when it’s theater?
When it is working, the language in the building changes and you find out secondhand. Somebody in a pricing conversation says “that’s a Quad 4 order” and everybody knows what happens next. The quad map gets updated quarterly without you asking. Your top ten profit accounts start appearing on senior calendars, on purpose, unprompted.
When it is theater, the analysis is impeccable and nothing moves. There is a steering committee. There is a phase two. The word “segmentation” appears in three decks. And revenue is exactly where it was, which people will describe as encouraging.
Here is the tell. Ninety days after the analysis lands, ask one question: what revenue have we walked away from?
If the answer is none, you didn’t do the work. You did the reading.
The three things worth keeping
One. The top 20–25% of your customers produce 105–150% of your profit — and the reason it exceeds a hundred is that the bottom is negative. Your P&L is an average, and the average is hiding two businesses that need two completely different management systems.
Two. Four quads. Quad 1, the core — protect and grow, and nearly all the profit lives there. Quad 2 — cross-sell the core, the cheapest growth you own. Quad 3 — graduate or hold. Quad 4 — re-price or exit.
Three. Occupied is not available. A manager spending thirty percent of her week on bottom-quintile accounts is not thirty percent available to you. That capacity does not come free until somebody makes a decision that releases it. Free first, then reallocate.
Ask the question this week. Write the numbers down. When the lowest answer in your room comes back at eighteen percent, you will understand why your leadership team is exhausted and your EBITDA is flat at the same time — and those two facts will finally be the same fact.
Luck is the residue of design. This is where you find out what you designed.
Frequently asked questions
What is the 80/20 rule in a middle-market business? It is not “focus on what matters.” It is a diagnostic run on your own transaction data that identifies which specific customers buying which specific products generate profit and which consume it. In practice the ratio is usually sharper than 80/20 — closer to 15–20% of inputs producing 80% of the profit. The finding that matters most: the top 20–25% of customers typically produce 105–150% of total profit, which is only possible if the rest of the business produces negative profit.
How can 20% of customers produce more than 100% of profit? Because the bottom of the book is negative. Your best customers are not just carrying the company — they are carrying the company and subsidizing the part of it that loses money. The blended average on a P&L hides both facts at once, which is why the number never appears in a monthly report.
What are the four quads in the 80/20 Engine? Customers are split A (top, by profit contribution) and B (everybody else); products are split core and tail. Quad 1 is A-customers buying core products — protect and grow, and nearly all profit lives there. Quad 2 is A-customers buying tail products — cross-sell the core. Quad 3 is B-customers buying core products — graduate or hold. Quad 4 is B-customers buying tail products — re-price or exit.
What is Quad 4 and why does it matter so much? Quad 4 is small, low-value customers buying small, low-value, non-core products. It is typically about 4–5% of revenue but consumes roughly 20–40% of capacity and generates about 60% of complaints. Cutting or re-pricing it feels like losing revenue; it isn’t. The four percent is not the cost — the four percent is the bait that keeps you paying for a cost structure sized for a company you don’t want to be.
What is the capacity diagnostic question? Ask each function head, in these exact words: “What percentage of your function’s productive time, in a typical week, is consumed by activities related to the bottom twenty percent of our customers?” Require a number, not a sentence, and write each answer down with the person’s name next to it in front of them. It takes about eleven minutes and works before you have any data. At a $310M industrial business the answers ranged from 18% to 41%, averaging about 27% — against customers worth about 5% of revenue.
What does “occupied is not available” mean? A manager who spends 30% of her week on bottom-quintile accounts is not 30% available for redeployment — she is 30% occupied. Occupied capacity is only released by a decision: a price increase, a minimum order value, a move to a distributor, a customer told no. Until that decision is made and holds, any new initiative goes on top of the existing load. Free capacity first, then reallocate.
What data do I need to run the analysis? One file, twelve months, line-item level, four columns minimum: customer, product, revenue, margin. Ask for the raw transaction extract and explicitly instruct Finance not to clean it — do not resolve duplicate names, drop odd product codes, exclude returns or remove “the weird stuff.” The weird stuff is the finding. A cleaned file is a file that has had the answer scrubbed out of it.
Find out where your profit actually lives.
The Profit Map calculator takes your customer and product mix and builds the quad map for you — revenue and profit in each of the four boxes, so you can see how much of the business sits in Quad 1 and how much capacity Quad 4 is quietly consuming. It takes about thirty minutes and it turns an averaged P&L into a decision.
Related
- The 1,000-Day Framework — the full four-phase method
- Earn the Right to Grow: The Two-Line Ratio — Phase Two, the diagnostic that comes next
- The Complexity Tax: Quad 4 and the Dirty Dozen — how to actually work Quad 4
Full transcript
EP03 — The 80/20 Engine: Where Your Profit Actually Lives
[00:02] A thousand days. That’s enough time to transform a company, but not enough time to waste. Welcome to the 1,000day CEO, the podcast about decisive leadership, sustainable growth, and building a business that thrives beyond any one leader. Your host is Bill Canady. Let’s make every day count. >> Second floor conference room, Power Band Parts. $310 million of revenue, 32% gross margin, 8% IBIDA, seven functional heads around the table, all of them competent, all of them tired, all of them holding a binder they spent the weekend preparing that I had not asked for. I asked him one question, not about their binders. I said, “What’s the percentage of your functions productive time in a typical week is consumed by activities related to the bottom 20% of our customers?” It’s total silence. Then the kind of shifting that happens when people realize the question is real. Engineering went first. 19% special drawings, one-off tolerances, quotes that never convert. Finance said 22. collections, credit exceptions, disputed invoices, the manual work of billing people who pay in 91 days. Wow, that takes a long time. Generally, remember it only comes after 30. So, operation scheduling said 28. Expedited changeover short runs and ahead of customer said 41%. Not apologetically, she said it in the way you say a number you’ve been carrying around for a while and you just hope somebody will ask. The lowest answer in that room that day was 18. Highest was 41. Average across every function was about 27%. Then the CFO, the good CFO, quiet the whole time, looked up from his laptop and said, “Those customers are about 5% of revenue.” 27% of the company dedicated to deliver 5% of the revenue. Nobody in that room was underperforming. They were
[02:03] working extremely hard on the wrong third of the business and not one report they received every month would ever have told them so. So here’s the proof and the promise and the plan to deal with it. Starting with the proof, in a typical middle market business, the top 20 to 25% of your customers produce between 105 and 150. You heard that right. More than the total piece of your profit. Read it again. It’s more than 100%. That is not a typo. And it is not enthusiasm. It’s the most important sentence in this whole episode. Because the only way a portion of this business can produce more than all of your profit is if the rest of the business is producing negative profit. Your best customers aren’t carrying the c the company. They’re carrying the company and subsidizing the part of it that’s losing money. And the blended average on your P&L hides both facts at once. At the other end, the bottom 20% of your customers typically account for about 5% of about 30% of capacity and about 60% of complaints. Now, here’s my promise. By the end of the next half hour, you’ll be able to take every dollar of revenue in your company and put it in one of four boxes. Know exactly what action belongs to each box and ask one question in your next leadership meeting that will tell you in about 11 minutes how much your company is currently occupied by customers who aren’t paying for it. Here’s the plan. It’s three moves. The first one is a data pull you can request today. And the second one is the analysis. And the third one is a question you ask out loud in a room. I’ll tell you how each one’s done. and I’ll tell you the three specific ways people run this analysis and get a useless answer because that’s more common than getting no answer at all. This is a thousand day CEO. I’m Bill Canady. Let’s get into it. Let’s start with the problem. 8020 has been ruined by being repeated. You hear it all the time. Everybody’s heard it. Everybody
[04:04] nods. And most people think it means focus on what matters, which is not a principle. It’s a greeting card. You cannot act on it. Nobody has ever walked out of a meeting focused on what matters and gained a point of margin. So let me restate it in exactly what it is. It’s a diagnostic. It’s not a slogan. It’s not a philosophy. It’s not even a mindset. It’s a measurement you run on your own transaction data that tells you which specific customers are buying and which specific profits generate all the profit in your business and which ones consume it. the critical 20% that drives 80% of the results, the vital few versus the trivial many. And when you actually run it on real data at a real company, the ratio is usually s sharper than 8020. In practice, in the business I’ve done this in, it lands closer to 15 or 20% of inputs, producing 80% of the profit. That’s right, even a smaller amount. So why doesn’t the CEO already know this? Because your P&L is an average. and it’s organized around the wrong thing. Look at how your financials get cut by legal entity, by plant, by region, by function, sales cost here, engineering cost there, operations down at the bottom. Every one of those cuts is useful for something. Not one of them shows you profit because profit doesn’t live in a function or a plant or a region. Profit lives at the intersection of specific customers buying a specific product. That’s the atomic unit. That is where almost certainly no report on your desk in any month shows you or your business cut that way. Which means the number you’re managing to 32% gross margin 8% IBIDA is a blend. And the blend has two entirely different businesses inside of it. One of them is excellent. Concentrated customers, core products, high margin, low touch, predictable. If you owned only that
[06:04] business, you’d be at 15 to 18% ebida. and the sponsor would be delighted. So would you. And the other one is a business that loses money on nearly every transaction and is bolded to the first one. And it is consuming the first one’s capacity to do it. Average them together and you get 8% Ebida and a board asking reasonably why isn’t this 12? Now the cost of not knowing. It isn’t just the money you lose on the bad transaction, although that’s real. The larger cost is that you allocate management attention evenly across a business where profit is distributed wildly une. Your best customers, the ones producing more than 100% of your profit, get a quarterly check in and a Christmas card. Your worst customers get more service than that because they complain more and the complaints route to attention. You have to build without deciding to a system that spends the most on the accounts that pay the least. You’ve just come out of meeting one with a goal. Meeting two, set the strategy, is due in weeks three through six, and strategy is a decision about where you will and won’t compete. You cannot make that decision honestly without that analysis in your hand. Do it in the wrong order and you will set a strategy on top of the same averages that got you here. And that’s a version of this that cost you even when nothing goes wrong. Two customers, same revenue, same product, same price. One orders 12 times a year in full palace and pays in 30 days. We like that. The other orders 140 times a year in singles, calls before each one, changes half of them after their release, and pays in 80. We don’t like that. Your P&L changes both of them at the same cost of goods and the same allocated overhead because that’s what allocation does. It spreads cost by revenue, which is precisely the assumption the whole exercise is designed to break. One more reason people skip it, and I’ll say this plainly, the answer is uncomfortable. It
[08:05] frequently implicates a logo the company is proud of, and once in a while, it implicates a customer the CEO personally brought in. That’s the real reason the analysis doesn’t get run, and it isn’t a data problem. on two axis. On the first axis, your customers rank by value, not by revenue, by profit contribution. Split them, the customer A, the A customers, roughly the top quartile or two. And then the ones producing the 105 to 150%. And then next, the B customers, everyone else. on the on the other axis your products and they’re sorted by strategic fit core products what you’ve actually built to make where they have cost advantage where the volume runs the tail products the accumulated inventory of everything you’ve ever agreed to make for anyone for some reason once cross them and every dollar revenue in your company falls in exactly four boxes before I name the boxes run the profit curve once because seeing its shape is what makes the boxes obvious. Now take your customer sorted best to worst on profit and add them up cumulatively. The line climbs steeply through the first quartile and by the time you’re through the top 20 or 25% of accounts, you’ve already above 100% of the profit that the company earned that year. That’s where it starts standing out. Then the long line goes flat for a long stretch. That’s the middle of your book. the accounts that essentially cover their own costs and nothing else. And then in the last stretch, it turns down and gives back somewhere between five and 30% of what you made. That’s the negative. The downturn at the end is not a rounding era and it’s not a data problem. It’s a portion of your business that you are paying to keep. Every business I run this on has that slope. Yours will too. The four quads. Quad one, the core, the fort. A customers buying core prof. This is where nearly
[10:07] all the profit lives. Not most, nearly all. In some businesses I’ve measured, quad one is in a quarter of the revenue and more than the entirety of the profit. The action here is protect and grow. And I want to slow down on protect because it’s a word people skip. Quad one is where your most competitor’s best salespeople spend their time. It is also almost universally the most underserved part of the business because these accounts don’t complain. They’re easy. They pay on time. And easy customers are invisible in a management system that routes attention towards noise. Ask yourself when your top 10 profit accounts last got an unprompted v visit from anyone senior. When did you go? In most companies, the honest answer is they didn’t. And the account screaming at you last week did. Quad two develop a customers buying tail products. These are good customers. They’re proven. They’re creditw worthy. They’re already buying from you who are buying the wrong things from you. The action here is crossell the core. This is the cheapest growth available to any market business and almost nobody works it systematically because sales compensation pays the same for a dollar of tail as a dollar of core. Now quad 2 is a list of names you already have with a relationship you already own. And the entire move is changing the mix of what they buy. Get them to buy the A products. Quad three, this is the one you earn in. Be customers buying core products. They’re buying the right things. They’re just small or new or lower margin because they were priced on the way in or maybe they’re just a small customer. The action is graduate or hold. Some of these are next year’s a customers and should be worked deliberately towards that. The rest are fine as they are. Serve them efficiently at standard terms at a standard price with no special handling and don’t spend management’s attention trying to make them into something they aren’t. This is
[12:08] where automation comes in. Think ordering online. Quad four, the tail. Be customers buying Tail products. Small lowv valueue customers buying small lowv value non-core products. This is the complexity tax. This is where profits go to die. The action is repric or exit. And I’m going to say the next part carefully because it is a single point in this episode where people flinch. Firing or repricing Quad 4 feels like losing revenue. Well, it’s not. That revenue is consuming a third of your capacity. And most of the complaints that you get to earn almost nothing. In fact, a lot of times it’s a negative. Somebody in your room is going to say, “But there’s still $4 million of revenue.” And they’ll be right about the four million. But they’ll be wrong about what it is. That 4% isn’t the cost. The 4% is the bait. It’s what keeps you paying for a cost structure size for a company you don’t want to be. Let’s start with the capacity diagnostic. Now, here’s the question. If you take one thing out of this episode, take this because it costs nothing. It takes 11 minutes and it works before you have a single line of data. In your next leadership meeting, go around the table one function head at a time and ask each one of them in these words. What percentage of your function’s productive time in a typical week is consumed by activities related to the bottom 20% of our customers. Then do two things. Make them answer that with a number, not a sentence, and write down what each one says with their name next to it in front of them. At power band parts, the answer were these. Operation scheduling 28%, finance 22, engineering 19. The lowest answer in the room was 18. The highest was 41. The average across every function was about 28%. And the sales number was its own conversation. Roughly
[14:10] a third of field sales time, the most expensive selling hours in our company, was going to accounts that produce almost nothing. Not because those salespeople were lazy, because small accounts need more help per order. And territories were built by geography rather than value. And every one of those reps were doing exactly what the system asked. 27 of $310 million company for five of the revenue. Lots of effort, [clears throat] little reward. Now, say someone always says the estimates are soft. Well, they are. These are guesses and they’ll be off by a few percentage points either way. Doesn’t matter. Nobody guesses 27 when the truth is four. The direction and the magnitude are what you’re after here. And you got them in 11 minutes for free. And there’s a second thing that happens in that room that’s worth much as the number. Once the head of engineering says 19% out loud in front of his peers with the CEO writing it down, the analysis you’re about to run stops being an attack on the sales organization. It’s now everyone’s number. They say it to themselves. You’re not going to have to convince that room of anything in three weeks from now. Occupied means not available. It doesn’t mean the same. One last piece, and this is the one that determines where any of these turn into money. Say your BP of quality tells you she spends 30 minutes of her week on bottom quartile accounts. The instinct is to think that’s great. Excellent. I have 30% of a quality VP available to redeploy. You don’t. She is not 30% available. She’s 30 30% occupied. This is not a word game. It’s the difference between a plan that works and a plan that produces exhaustion. Occupied capacity has to be released by a decision before it can be reallocated. Someone has to raise a price, set a minimum order value, move an account to a distributor, or say no to a customer. Until one of those decisions is made and
[16:12] holds, the 30% is spoken for. And any new initiative you put on her plate is going on top of it. This is where most 8020 programs die and they die quietly. The analyst is right, the deck is good, the new growth initiatives get assigned and nothing gets removed. Six months later, the leadership team is doing everything they were doing before plus a growth agenda and the CEO cannot understand why the team is strong is moving away this slowly. Why is nothing happening here? You have to free capacity before you can reallocate it. free it first, then reallocate in that order every time. I know you just want to tell them to do it, but you got to free them up. Now, the plan, it’s three moves. The first one you can request before lunch. Move number one, pull the 12 month transaction file. One file, four columns minimum, customer, product, revenue, margin, line item three, 12 months so seasonality doesn’t distort it. Ask your CFO for it directly and give the specification out loud because the request will get interpreted otherwise. What you want is the raw transaction extract. You not the summary. You need the raw data here. And here’s the instruction that matters most. And you have to give it explicitly or you will not get it. Do not clean it. They want to give it to you where it’s all prettied up. Don’t let them do it. Give you the raw data. The weird stuff is the finding. A file that has been scrubbed clean in a t into tidy shape is a file that has had the answer scrubbed out of it. Tell them raw extract. 12 months, four columns, one file this week. You’d rather have it ugly on Friday than beautiful in a month. Second move, build the quad map. Rank customers by profit contribution and split A from B. Sort products into a cartel and let the ED operator make the call, not a spreadsheet. Because core is a judgment
[18:14] about what your business is built to do, not a percentile. Then put every transaction in its box and total the four boxes on two dimensions, percentage of revenue and percentage of profit. That’s the deliverable. Four boxes, two numbers each. it fits on an index card and it will be the most valuable index card in your building. Now, the three warnings here because I’ve watched all three of these ruin the work. First, don’t do it at an account name level. If you grade whole customers and so transactions, you’ll lose quad 2 entirely. And quad 2 is the cheapest growth you own. Big customers buy tail products too. Small customers buy core. The analysis only works at the transaction level, which is precisely why the account name shortcut is so tempting. It’s much faster and it gives you an answer that feels right, but it is wrong. Second, don’t let sales grade their own customers. You cannot ask the lion to guard the analopee. Every account will come back strategic. Everyone will have a reason. Long relationship growing next year gets us into a vertical. The parent company is enormous. Grade the accounts on the data first in a room without the account owners in it. Then bring sales into a challenge, the specific cases with evidence. The order matters. Data first, argument second, and the argument has to move the number to win. Number three, don’t stop at the chart. This is the most common failure and the most expensive one. The analysis gets built. It’s genuinely good. It gets presented to the leadership team. Everybody agrees. It’s illuminated. And then it becomes a document. 6 weeks later, it’s in a folder and the business is running exactly as it was. The chart’s not the deliverable. The decision is nothing has happened until a price has moved, an account has been retermed or a product has been retire retired. What it looks like when it’s working and when it’s the when it’s working, the language in the
[20:15] building changes from and you find out about it secondhand. Nobody is a pricing conversation. Somebody in a pricing conversation says that’s a quad four order and everybody in the room knows what that means and what happens next. The quad map gets updated quarterly without you asking and your top 10 profit accounts start appearing on senior calendars on purpose unprompted. When it’s theater, the analysis is impeccable and nothing moves. There’s a steering committee. There’s a phase two. The word segmentation appears in three decks and his revenue is exactly where it is, which is what people describe as encouraging. And here’s the tail I use. 90 days after the analysis lands, ask one question. What revenue have we walked away from? If the answer is none, you didn’t do the work. You did the reading. Okay, the number. Three things to keep from this one. Number one, the top 20 to 25% of your customers produce a 1005 to 150% of your profit. And the reason it exceeds 100 is that the bottom is negative. They’re taking it away. Your P&L is an average and the average is hiding two businesses that need completely different management systems. Number two, four quads. Quad one, the core, the fort, protect and grow. Nearly all the profit lives there. Quad two, cross- sell the core, and it’s the cheapest growth you own. Quad three, graduate or hold. Quad four, repric or exit. Firing or repricing Quad 4 feels like losing revenue. It’s not. That revenue is consuming a third of your capacity and most of your complaints to earn almost nothing. Number three, occupied is not available. This is a good one and it’s tough to handle. A manager spends 30% of her week on a bottom quartile account is not 30% available to you. She’s 30% occupied and that capacity does not come free until
[22:15] somebody makes a decision that releases it. Free first then reallocate. That’s your job. And the one question which cost you nothing in 11 minutes. What percentage of your function’s productive time in a typical week is consumed by activities related to the bottom 20% of your customers? Ask it this week. Write the numbers down. When the lowest answer in your room comes back at 18%, you’ll understand why your leadership team is exhausted and your ebid flat at the same time. And those two fa facts will finally be the same fact. Luck is the residual of design. And this is where you find out what you design. Next week is the one I’d pick if you only listened to a single episode in this season. It’s a ratio. two lines off your P&L, about 30 minutes of arithmetic, and it returns one verdict. Whether your company has earned the right to grow at all, and whether you’re right now would make your business bigger, busier, and poorer. There’s a threshold number, and I’ll give it to you. And the most middle market businesses I’ve measured, come in under it the first time. You want the quad template and the capacity diagnostic, all the questions and the tables to write them down in. They’re all available at the ad20institute.com. Lots of courses and lessons there for you to come in and try them out. It’s a diagnostic and these things typically take about 30 minutes. I’m Bill Canady and I’ll see you at the next 100 days. >> You’ve been listening to the 10,00 CEO with Bill Canady. Follow the show for more decisive leadership, sustainable growth, and strategies that build enduring businesses. Until next time, make every day count.
