Martial Arts Business And The 80/20 Rule

I first spoke about applying the 80/20 rule (also known as the Pareto Principle) to martial art school management when I wrote Small Dojo Big Profits back in 2003. The 80/20 rule is an economic principle based on observations on cause and effect in population and economics.

Quite simply, it states that 80% of your outcomes will come from just 20% of possible causes.

80-20 rule

© Jasmin Merdan – Fotolia.com

A few illustrations:

  • 80% of your profits come from 20% of your clients (I’ll explain this in a minute)
  • 80% of your leads come from just 20% of your marketing
  • 80% of your referrals come from just 20% of your clients

And in reverse:

  • 20% of your clients take up 80% of your customer service time
  • 20% of your accounts require 80% of your efforts to collect
  • 20% of your programs generate 80% of your enrollments

Granted, it doesn’t always work out this way, but I’d hazard a guess to say that the 80/20 rule does turn out to be applicable to most areas of your business.

So, how can you use this knowledge to improve your efficiency and increase your profits? Let’s take a look at a few key areas of your school where we might apply this information to great effect.

Customer Service and the 80/20 Rule

Truth be told, not many people knew about Pareto’s Principle until Tim Ferriss released The Four-Hour Work Week back in 2007. In it, he explains how he applied the 80/20 Rule in his nutritional product business (some of you may remember seeing advertisements for his product, BrainQUICKEN, in martial arts mags a few years back).

Ferriss realized that 20% of his clients were taking up 80% of his customer service time. He also realized that 20% of his clients were driving 80% of his profits, but that those two groups didn’t necessarily overlap.

So, he fired all his high-maintenance, low-yield clients.

The result? He immediately cut his workload substantially, in addition to reducing his stress levels.

But how can we apply a similar approach to our martial art business? I’ll tell you how – by quickly eliminating problem clients from your school.

Here’s an example. I have a coaching client who was growing his fitness programs, and he called me to ask what he should do about a particular member that just wasn’t fitting in.

“She’s always complaining,” he said. “No matter what we do, she always complains, or has an excuse why she can’t do it, or she decides to do something different and does her own thing. What do you recommend I do?”

“Fire her,” I said. “Next time she refuses to do something you ask her to do, go write her a refund check and tell her that your program just isn’t right for her, and it’s not working out. Be polite, but let her go. You don’t need the headaches, and I bet your other clients will thank you for it.”

And guess what? They did.

I can tell you for a fact, one or two problem students can ruin the atmosphere of your entire school. And, they’ll drive away your best customers. I know you probably want to help everybody, but unfortunately you can’t, and that goes double for people who won’t follow the program (people who simply refuse to be helped).

So, save yourself the stress, and cut them loose.

80/20 Martial Arts Marketing

A few years back, I realized that I was getting the bulk of my leads from just a few lead sources, even though I had 10-15 marketing methods running in any given month. My stats showed me that these few marketing methods represented about 20% of my marketing, but they generated about 80% of my leads.

Before presenting this to my coaching clients, I actually ran a poll to find out which marketing methods school owners across the country found to be the most effective. Sure enough, the results reflected my own stats.

Now, I’m not going to say what they were, because marketing changes so rapidly these days that what was true even a few years ago may not apply today. However, I will say that in order to use your resources of time and money most efficiently, you need to be on top of your lead stats by source 24/7/365.

Most small business owners are happy to just be getting new business, and they don’t bother tracking leads by source because it’s too much hassle. This is a huge mistake.

For one, if you know which 20% of your marketing methods are generating the bulk of your leads, you can focus more of your marketing efforts and dollars on those methods. And, if they’re scalable, you can increase your leads by an equivalent factor (at least until the law of diminishing returns kicks in).

On the flipside, if you don’t know where most of your leads are coming from, and if a lead source suddenly dries up (as will happen from time to time), you’ll have no idea how to fix it. Instead, you may end up throwing more and more money at a lead source that is generating very few leads… all while you could have increased your spending and activity in another area and made up the difference.

So, track your leads by source, and focus 80% of your effort and money on those 20% of lead sources that generate the bulk of your leads, while using the other 20% of your time and money to keep other lead sources in the mix to diversify your marketing (as a safety net).

80/20 Customer Referrals

I can almost bet that 80% of your referrals come from 20% of your customers. There are two ways you can use this information to your advantage:

  1. You can further incentivize referrals to that group of customers, thereby increasing the number of referrals they are already bringing in –
  2. And, you can find out what you did to make that 20% want to refer people to you, and then do your best to replicate that with the other 80% of your customers –

Sure, a certain number of your clients will simply never refer anyone to your school; that’s a given. But, if you can get the people who are already referring business to do it more often, and perhaps encourage those who aren’t yet referring their friends and family to do so now and again, you could conceivably increase your referrals by 50% or more over time.

How 80% of Your Profits Come From 20% of Your Clients

In my experience, the average martial art school loses between 3% and 5% of their students each month to attrition. For a school with 100 students, over the course of a year that equates to losing between 36 and 60 students to attrition if your enrollment remains constant.

However, when we look at the attrition rates over a period of years for a given group of enrollees (say, folks who all started in the same month), we start to see a curious trend. I have a reverse-attrition calculator spreadsheet that is included as a tab in one of the bonuses in the revised version of Small Dojo Big Profits that can help to illustrate this nicely.

Let’s say you start with 100 students, never add another student again, and your attrition rate remains constant at 5%. At somewhere around 2.5 years in, you’d be down to just 20 students from the starting group. In other words, you lose 80% of a given set of enrollees in the first 2.5 years.

So, how does this impact our profits? Well, it tells us that just 20% of our clients will stick around longer than a few years. Those people are your “hard core” students. And, I’d hazard a guess to say that they’re the ones who show up for all the events, buy more gear from your Pro Shop, upgrade to unlimited training programs (and a higher tuition rate), and so on.

In short, that’s your 20% of clients that are generating 80% of your profits over time. So what does that mean to you? Well, what it means is that if you’re making the mistake of focusing all your effort on keeping your beginners instead of your intermediate and advanced belts, you are letting your best clients waltz right on out your door.

Now, I know after last week’s post this one is going to get all kinds of sticky in the comments, but I just want you to go back and consider this as you think about how you can keep more of your students around for the long haul.

80/20 Membership Upgrades

Here’s something that’s fun to do with the 80/20 Rule, and it comes from Perry Marshall’s new book, 80/20 Sales and Marketing. (Incidentally, that link will get you the book for a penny plus shipping for a limited time. If you’re digging this article, I suggest you read that book, as it will shed light on this subject in ways I don’t have time to touch here.)

As Perry demonstrates in the book, 80/20 results follow a power curve. To put this in the perspective of a school owner, what this means to you is that for every 100 people who are willing to spend $100 on tuition each month, 20 of them would be willing to spend $400 a month, if you could get the right offer in front of them.

I know this sounds crazy to a lot of you, so you’ll have to read his book to understand how he backs that claim up. However, what you need to get out of this is that a certain minority of your existing clients would be willing to pay you a whole heck of a lot more for your services, if you’d only give them a reason and an opportunity.

  • Do you have an upgraded membership? If not, add one today.
  • Do you offer private lessons? If not, start now.
  • Do you offer extracurricular training? If you don’t, what are you waiting for?

It costs you nothing to add these program offerings except for your time in the case of teaching private lessons, so there’s really no reason why you shouldn’t do it. For more ideas on how you can add to your bottom line without increasing your overhead (that apply specifically to martial arts business), check out my book, The Profit-Boosting Principles on Amazon.

In Closing

So, those are just a few ways that knowing and applying the 80/20 Rule in your business can help you run a more efficient and profitable studio. Can you think of other ways to apply Pareto’s Principle in your martial art school? I want to hear them, so feel free to let me know in the comments below.

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