80/20 Rule Applied

Most of us are familiar with the 80/20 rule, or the Pareto Effect, as it is most commonly known. The 80/20 rule has been represented in business discussion as 80 percent of production comes from 20 percent of the producers for many years. More broadly the 80/20 rule has been applied to every imaginable situation in business with amazing accuracy. Reading this complex information is fairly heady stuff, not known for light content, however a little struggling makes it more understandable. Vilfredo Pareto was after all an accomplished engineer, mathematician, sociologist and philosopher, whose doctorial thesis was on equilibrium (I would not attempt reading it) and so this theory has serious science behind it.I’ve heard for years that 80 percent of a restaurant’s business comes from 20 percent of its customers (guests). My personal experience validates this be correct or at least close. So if you’re like me and believe this, how does this belief translate to the average restaurant’s sales and potential profit? There is significant variation in restaurant business models and so a one size fits all is not possible, but with some work I believe the 80/20 rule can be applied to any situation.From my own experience I’ll take an average restaurant and break it down in terms of contribution following the 80/20 rule. Assume with me that this imaginary restaurant has an average of 1.5 customers per check, or average ticket of $15.00. Further consider this restaurant generates $125,000 per month in sales, equaling 8,333 tickets. Working the numbers using the 80/20 effect mean 1,666 checks contribute $100,000, or $60.02 per paying customer, or about four restaurant visits per month.One can blow holes in the calculation, but I don’t think it’s too far off. In one chain where I worked these high use customers were called “heavy users” and further less frequent users were called “medium users” and less still were called “light users”. My former employer, who by the way spent millions annually on consumer trends and buying habits, thought the greatest potential to build business was with medium users and those most vulnerable were heavy users, this once again can be argued. I’ve noticed both as a former restaurant owner and as a company employee concerned with such things that I rarely lost a heavy user (we all know who they are), but on occasion I would simply see them less often, which validates the theory of heavy user vulnerability.My thesis, and once again this can be argued, is successful restaurant operators look for ways to maintain heavy user buying frequency, even if it means a decrease in the average check with in store specials. He/she also look to convert as many medium users as possible into heavy users with off premise marketing. The occasioned or “light user” is the most difficult to convert because they may be using your location out of convenience. As an example, a couple of restaurants I visit only when I’m in the area and would never just happen-by; restaurants are rarely destinations in and of themselves.One question that comes up for discussion and I imagine debated is how best too market and advertise to each of these customer groups (perhaps that’s a Blog for a marketing expert)? There are several things I know or at least are relevant in this economy.1. As operators we had better put the “hospitality” back into the business (assuming its missing). The customer is even more right today than he/she was in the “good old days” when the economic reality was different.2. Don’t reduce the quality of any product on your menu in an effort to save money. If portion size is reduced make sure it is done for the purpose of providing a lower retail-selling price. Imagine as a customer an item you like is reduced in size and the price is not correspondingly lowered or the quality of an item you like is reduced…3. Be optimistic and never engage in negative conversation with employees, customers or anyone else. There is a real tendency to engage in “the sky is falling” conversation, which does nothing to help your business. There will be failures, make sure its not you.4. Get your operational house in order, be the best you can be. This is a difficult one; I’ve been to terrible restaurants where the owner/manager thought his/her operation was superb. If you’re a chain multi-unit supervisor hold your scheduled weekly, monthly or whenever staff meeting at each location on a rotating basis beginning each meeting with a tour for all other managers in attendance. Peer pressure is a powerful motivator. If you’re an independent, hire a consultant for one day and get a critical evaluation. The point, this is not the time for big egos, as the old biblical saying goes, “pride cometh before the fall”.5. Get rid of employees who do not love serving others, that’s what we all do after all. Replace or reeducate those without smiles and personality and by all means make sure you as manager/owner are leading the way.6. Look at in-store marketing and advertising. I am very proud to say that one of my clients has increased his business by 10% over last year using in-store a marketing and training package I designed. His average check is down but frequency is up, which in the end is the winning game since the idea here is increasing frequency of use.7. Reduce the size and scope of your menu, trim it down to what you can reasonably deliver in an outstanding manner.8. Now is the time for portioning, consistency is the key here making sure value is delivered (value is more than just price).9. Make your restaurant the model of cleanliness, sanitation and food safety. Restrooms are particularly important, add light where possible. Give tours of your kitchen; invite customers in for a closer look.10. Serve something and/or someone greater than yourself. This may mean a local charity, children’s home you name it, be creative and market it professionally to your customers.11. If your business caters to the family, make sure your restaurant markets tastefully to kids without turning off parents. If you want to make an adult friend compliment their kids.12. Reward your customers and your employees, buy an occasional dessert or dinner, recognize an employee for customer satisfaction and make a big deal out of it. Post and involve others in setting realistic and attainable goals in those critical areas of sales and line item management.When the history of this time is written those who survived will have done so by improving operations and continuing to be relevant in the eyes of customers who are more watchful of where and how their dollars are spent.
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  • Mark it always about quality and you can not have quality without quality people. But put another pitch on the 80/20 rule and also change the concept of upsell to the concept of bring them back. Quit worrying about upsell and start getting your staff to bring them back and requesting you to wait on them. One upsaloe maybe worth $5-7.00 and even at at 20% tip that come to $1.40 extra money in your pocket and $3-5 for the house. Bringing them back maybe a $30-40 ticket and even at a 15% tip that come to an extra $4.50 to $6.00 and people who request a waiter usually tip more than 15%.

    Just an idea give your waiters the right to give away a couple of deserts a shift or maybe even require that they give away a couple of deserts or maybe even pick up a drink. I bet that will work better than any coupon.

    I would like other thoughts on this.
  • David, I agree overall with your comment, it would be insanity to think business can be built on the back of constant discounting, there are many companies that have proven this including Burger King with the Whopper, which was arguably the best burger of the major chains however with the constant pricing at .99 BK pretty much killed the value of the product, hundreds of millions of dollars in marketing dollars spent later the value of the Whopper is still .99 in the minds of too many customers. It was not until recently they reposition themselves with other higher quality and higher priced products that they were able to recover in the value area.

    There is one situation where I think discounting has its place (some might disagree) and that is when the customer based has to be expanded fast, in situations like this restaurants must get people in the door and an overwhelming offer can make that happen. That having been said, I would not follow-up with more discounting and I certainly would not make it a practice even though and many would agree there are too many restaurants chasing too few restaurant dollars. Desperate restaurants, as can be said of people in general, do desperate things.

  • You are preaching to the converted. Value, not discounting or being cheap is the name of the game. Staying close to the consumer and meeting their needs best is always a winning game.
  • I love the way you think...Great post Mark. I am in total agreement that a strong sales building initiative is bring the medium to heavy user in at least one more time per month. If you do that you see substantial increases in sales and traffic. I also agree that creating improved value (nothing to do with price point)is the way in which they are enticed to come back with a higher frequency.

    It is my understanding that these types of users are only influenced by an improved value, which I believe is what you describe in your list of "12" above. You get all of those pieces of the puzzle put together in your operation and I don't see how your frequency can't improve, correct?
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