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Putting the 80/20 Rule to Work

May 2008, F&I and Showroom - Feature

by Denny Long

We’ve all heard of what is most commonly known as the 80/20 Rule, aka the Pareto Principle, the Law of the Vital Few, or the Principle of Factor Sparsity. The question is, have you ever attempted to apply it to your special finance department? With current economic conditions

dictating that we do everything possible to increase efficiency and effectiveness, this method definitely deserves a little analysis. But let me warn you: Once you apply this principle in one area, it may be hard to stop looking for more.

1. Follow the rule

Large books have been written about this subject, so it’s impossible to explain the entire principle in full detail in a short article. The goal here is to provoke your thoughts a little and have you look at the possibilities when you apply the principle at your dealership. The principle basically states that 80 percent of your results come from 20 percent of your efforts. It’s a misconception, however, that the two numbers need to add up to 100. Because the two numbers are separate items (effort and results), it’s possible that 80 percent of your results could come from 30 percent, 40 percent, even 50 percent of your efforts. Regardless of how the numbers come out, if you use this methodology to analyze every aspect of your sales process, you will find a number of ways to close those deals faster and cheaper.

2. Track your efforts

I have found that few dealerships really do a great job of tracking which forms of marketing really produce the sales. There are just too many “moving parts” that cause variances in the final results. Did your business development center generate the lead, or was it your infomercial, radio campaign or direct-mail promotion? It’s time to have a meeting with all involved to let them know the importance of this analysis. After all, if those involved are on commission, they wouldn’t be too happy if you cut out your best advertising method because they wrote down the wrong ad source on a few sales. It’s hard to apply the 80/20 Rule without having a proper tracking system in place.

With proper tracking, there’s a very good chance that you will find 80 percent of your gross profits are generated by 20 percent, 30 percent or 40 percent of your advertising dollars. Notice that I said gross profit, not units. This is because higher gross profit customarily generates higher net profit. That’s why you open the doors every day – not to sell vehicles, but to generate a profit. You are likely to find that some advertising methods generate higher gross-profit sales while others generate a lot of low-gross sales.

3. Focus on the 20 percent that works

You should not limit your application of the 80/20 Rule to your marketing budget. You need to look at every process that leads to the sale. For example, if a manager who’s calling to confirm an appointment doubles the rate of customers who actually show up, this is a perfect example of the items you do 20 percent of the time producing 80 percent of the results. For one week, ask each of your employees to keep a log of everything they do in 15-minute intervals. Then ask them to place a star in front of each 15-minute period where the effort helped to generate a sale. At the end of the week, each employee will have a better understanding of their highly effective tasks. With this information, you can build a great training manual.

4. Make the 80/20 Rule part of your training

Speaking of training, the teaching of this principle needs to become an essential part of your training program. (You do have a training program, don’t you?) Training is a perfect example of a function that you can spend a relatively small part of your work week on and generate major results. The most effective dealerships I have visited all spend three to five hours per week on training.

Here’s an example of how to train using this principle: Some salespeople sell five vehicles per month; others sell 50. What’s the difference? Top salespeople spend more time in the 20 percent zone — the area of peak performance. You won’t find a sales superstar spending much time chatting with other employees. They spend their time engaging customers and potential customers in the showroom, on the lot, in the service department, or on the phone. Where would your sales be if your dealership was full of highly effective salespeople? But don’t limit this to just your salespeople — everyone can benefit from this principle, including BDC personnel, desking managers, sales managers, F&I managers and the like. When all employees work in the highly effective zone, the dealership will be the big winner. Good luck and good selling!

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