The 80/20 rule – The Pareto Principle

You’ve probably heard of the 80/20 rule, or to give it it’s proper name ‘the Pareto Principle’, but do you use it to the full effect? Do you focus on the 20% that gives you the 80%? Or are you being a busy fool….?

Ok, so let me define the Pareto Principle first, then we can look at how you can use this magical analysis tool on your business to make it more effective.

The 80/20 rule basically states that;

“80% of results (also known as ‘outputs’ or ‘outcomes’) originate from 20% of sources (or ‘causes’ or ‘inputs’)”.

The application of the 80/20 Pareto Principle in business is that you need to identify what the 20% is, ie your best assets, and then prioritise that and use it more efficiently to further increase your value/outputs to the maximum.

The rule can, and should, be applied to all sorts of different metrics;

• Time – analyse where you spend your time, and what it delivers
• Revenue – where does 80% of your revenue come from?
• Clients – look at your clients and I bet that 20% of them deliver 80% of your revenue
• Products – do the same with your products
• Actions that generate revenue – what are you doing that’s making the most money?
• Revenue v Profit – look at your margins; big revenue isn’t always big profit on the bottom line
• Marketing – which bits of your marketing deliver most sales and profits?
• Anything else – you can use this on any metric you chose

So, , how do you apply the Pareto Principle to your business?

Step 1 – analyse your data on whichever of the above parameters you want, and perhaps across multiple ones. Or even different ones. I guarantee you will find 80/20 everywhere.

Step 2 – the key to this, and all business analysis, is to decide, based on what you find, what are you now going to do to enable you to focus on the RIGHT things?

You may end up ceasing to sell a product or service because they are not contributing. You may drop certain clients if their margins or revenue is too low. You may stop doing certain things in your day-today schedule that don’t create value. There are a wide range of actions that will fall out of this exercise, The data is there. It’s telling you where the gold is buried. It’s so simple, it’s magical.

When we owned my business we did this analysis on our clients, and which ones provided most revenue. We found that around 75% of our revenue came from 15% of our clients. Not exactly 80/20 but close enough. Be wared however that you don’t want to tip too far so that too much of your revenue comes from too few of your clients.

Did you know?

The 80:20 rule is named the ‘Pareto Principle’ after an Italian economist called Vilfredo Pareto who noticed it while at the University of Lausanne in 1896.

Let me know how you get on. Did you find 80/20s? What are you going to do now you’ve found them?

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