Pareto Principle: The 80/20 rule
Pareto Principle: Using the 80/20 rule to grow your business
Who is this man and why is he Famous?
The 80/20 rule is more widely known as Pareto’s Principle (I’d so love to one day have a law or a principle named after me) as it was named after the Italian economist Vilfredo Pareto. The general gist is very simple and is based on the principle is that there is always an unequal relationship between the effort we expend and results we obtain – roughly split as high as 80/20 in many cases. Pareto studied multiple examples to get to this principal and in 1906 even created a mathematical formula to prove it.
Taken as a general rule 80% of your profit will come from 20% of your customers. 80% of your turnover may come from just 20% of your marketing – you get the idea – its pretty simple. He also advised that sometimes this is even higher even upwards of 95% in extreme cases.
WHAT DO I DO NOW?
Now that you are more aware of this fact it’s crucial to go ahead and identify the disparity in your business and then work on leveraging what’s currently working for you and also reducing what isn’t. If we take the marketing example and you found that 80% of your business came from just 20% of your advertising spend then the logical step would be to massively increase the spend in this area and reduce a large portion of the 80% that was only getting you 20% of your results.
For small business owners who constantly complain about feeling overwhelmed and having a huge “to-do” list it’s vital that they study both their input and output and look for areas where Pareto’s principal is in effect, possibly right under their noses and begin working to apply some radical changes as quickly as possible.
The 4 key areas to evaluate are:-
- Daily Habits
Once you have done this check your key data. What does it tell you? Once you’ve identified the biggest or easiest area to improve work out a plan to eliminate or modify what is not working and concentrate on what is thus leveraging this for higher ROI in time or dollars.
Remember to track and measure the changes to ensure that what you have changed has made a positive effect.
Don’t stop – The Pareto Principle can be applied to any area in your lift that you can this already in effect and being to change this also.