Understanding the Pareto Principle – the 80/20 Rule – Can Boost Your Productivity, Profit, and Advertising Power.
This article originally appeared at Gen-i’
As the story goes, back in 1906, the Italian economist, Vilfredo Pareto was in his garden looking at his peas. He noticed that a very small number of pea pods – twenty percent – were responsible for the majority of the healthy peas that he harvested: eighty percent. On the other hand, the majority of the pods gave him very few healthy peas: the remaining twenty percent.
This got him thinking, and he noticed this 80/20 ratio elsewhere, in the land distribution in Italy. He noticed that eighty percent of the land in the peninsula was owned by only twenty percent of the population. The same, by the way, is true today.
Since then, we have seen this ratio in many things, thanks to the marketing consultant, Joseph Juran, who named it ‘the Pareto principle’. Think about your clothes. You will wear twenty percent of your total clothes eighty percent of the time. Or books. Eighty percent of the information is contained in only twenty percent of their pages (say the introduction and conclusion). Juran’s principle – ‘the vital few and the trivial many’ or the 80/20 rule – states that eighty percent of effects come from twenty percent of causes.
This rule is crucial for business, as it has applications everywhere you look!
Time management: Be productive, not busy.
We all see those people running around looking stressed and anxious because they have so much to do. Whilst they may be very successful, it’s likely that the majority of their time gets a little wasted.
According to the Pareto principle, eighty percent of the results that they see – in terms of clients gained, deals made, or money earned – probably comes from only twenty percent of the work that they have done. The remaining eighty percent of work produces very meagre results.
If you want to be productive, rather than just flat-out busy, you might want to focus your attention on the gains made by the most vital portion of your time: the twenty percent. The rest can be given less energy, focus, and stress.
When you are thinking through the HOW Skill Set, remember when you are most productive and what tasks bring the best results.
Profit and Customers
Another example of the 80/20 rule – the most famous, probably – is profit. Generally speaking, eighty percent of the profit that your business makes will come from only twenty percent of your customers. These are your key customers, your ideal customers, the ones you want to cultivate, keep, and with whom you want to strengthen your relationship. Think about it. Eighty percent of your customers only give you twenty percent of your income!
Consider time in this also, twenty percent of your customers will give you eighty percent of the trouble. As Perry Marshall, the wizard of the Pareto principle, writes here, it is well worth letting them go. They aren’t worth your time.
This rule shows you that you should be focusing your energies on the minority of most lucrative customers. These are the customers that share your values and worldview, the customers that have the problem that your product or service seeks to solve, the customers that repeatedly use your products, are easy to do business with, and bring in more customers.
Think about who these ideal customers are and find out what they have in common. Knowing their profile can help you to find more customers like them and can allow you to strengthen your relationship with them. So, stop thinking about how many customers you have, and start thinking who they are, and whether they are the vital customers of that twenty percent.
Interestingly, the Pareto Principle works exponentially. So, in the twenty percent of vital customers, there is another twenty percent of super-vital customers. According to research published in Forbes, the twenty percent of the twenty percent – or four percent of all customers – contributes sixty-four percent of your profits too!
By this point, you won’t be surprised to hear that this 80/20 ratio can be found all over the place in the business world. Here are some examples of ways you can apply the 80/20 rule to your business today:
- Eighty percent of your sales probably come from only twenty percent of your products. These will be your key products, the ones that are the most successful. You will probably know which ones these are.
- Eighty percent of your leads will come from only the twenty most effective percent of your advertising. In practical terms, this might mean that only two of the ten posts on your blog bring in the vast majority of your readership. Work out which ads, what content, are doing the most work for you, and build on them.
- Finally, eighty percent of your business’s sales will be made by twenty percent of your sales team. It might make you wonder what the other eighty percent are up to! Think about which staff are landing the most sales, and which might be better used elsewhere.
So, have a think about how this principle applies to your time, profits, customers, advertising, products, sales… and even your wardrobe!
You will be amazed how this simple principle shows up every day!
How to Use the Pareto Principle: Action Points.
- Audit all of your processes – from productivity to content posts. I know I have some blog posts that outperform all others, for example. It’s crucial that you know your strongest twenty percent.
- Divert resources – energy, time, people – from some of the less powerful to the top twenty percent. Knowing it is all well and good. But the key to the Pareto Principle is making the most of the twenty and leaving the eighty behind.
- Protect the time in which you are most productive. Are you most productive from eight until ten, whilst the rest of the day your mind wanders? Protect that time: don’t allow any disturbances!