THE 80 – 20 RULE IN BUSINESS (PARETO PRINCIPLE)
The Pareto Principle is named after Italian economist Vilfredo Pareto, who in 1906 observed that 80% of Italy’s wealth belonged to only 20% of the population. More generally, the Pareto Principle is the observation (not law) that most things in life are not distributed evenly; that for many events, roughly 80% of the effects come from 20% of the causes. It can mean all of the following things:
- 20% of the input creates 80% of the result
- 20% of the workers produce 80% of the result
- 20% of the customers create 80% of the revenue
- 20% of the bugs cause 80% of the crashes
- 20% of the features cause 80% of the usage
The list is endless. But be careful when using this idea. There’s a common misconception that the numbers 20 and 80 must add up to 100 – they don’t.
The Pareto Principle has been used by business owners and executives for years as it is an incredible tool for growing your business. Before you begin work, always ask yourself, “is this task in the top 20% of my activities or in the bottom 80 %? This means that if you have a list of ten items to do, two of those items will turn out to be worth as much or more than the other eight items put together. Each of these tasks may take the same amount of time to accomplish, but one or two of those tasks will contribute five or ten times the value as any of the others. If you can figure out which 20% of your time produces 80% of your business results, you can spend more time on those activities and less time on others.
The most valuable tasks you can do each day are often the hardest and most complex. But the payoff and rewards for completing these tasks efficiently can be tremendous. Likewise by identifying the characteristics of the top 20% of your customers (who represent 80% of your sales), you can find more customers like them and dramatically grow your sales and profits.
The Pareto Principle is an extremely powerful tool, when properly applied, for any growing business. The key is knowing how and when to apply it.
Top 5 ways the Pareto Principle can improve your business
- Increased Productivity
The Pareto Principle is very useful for determining which areas to focus your efforts and resources on in order to achieve maximum efficiency. By using the 80-20 rule, individual employees can prioritize their tasks so that they can focus on the critical 20% that will produce 80% of the results. It can also be used to identify unproductiveness in the workplace. As a manager, you can utilize the 80-20 rule to establish the 20% of causes that result in 80% of the unproductivity and subsequently take appropriate measures to resolve the issues causing unproductivity. Social media distractions, unskilled workers in their field and an unsuitable work environment all contribute to unproductivity in the workplace.
- Increased Profitability
Regardless of the type of your business, it is a common occurrence in any business that roughly 20% of your salesmen produce 80% of your sales. Depending on your end goals, the Pareto principle can be used to determine whether you need to focus your effort and resources on the 20% of staff that produce most of your sales to further improve their skills or to focus on the 80% of other employees that are struggling to bring in any sales.
Also, the Pareto Principle shows that a small percentage of your total amount of customers produce majority of the revenue. Similarly, only a handful of your products and/or services attract the most sales. As such, analyzing the leads and current customers you have can help you determine which ones have produced the most revenue in the past so that you can focus on pursuing only the most valuable leads. Further, discontinuing the products/services that don’t generate revenue and focusing on improving the ones that do generate revenue can be ultimately more beneficial for the business.
- Website Optimization
The 80-20 rule suggests that a standard overview at your business’ website analytics will indicate that roughly 80% of traffic lands on 20% of your website pages. The 20% of pages that attract the most views are generally the critical pages that display content in relation to the purchasing process of your product or service. Using the Pareto Principle to analyze hoe traffic flows through your website will allow you to optimize it to ensure that it is straight forward for your viewers to access the critical pages of your website. This is not only proven to increase sales, but it also allows your business to grow at a faster rate with lower amounts of traffic.
- Identify and Fix Problems
A Pareto chart is highly useful for prioritizing problems so that you can determine which issues have the greatest effect on the outcome of a given situation. This not only allows you to identify problems, but it also enables you to take appropriate actions to resolve the most important issues concerning your business.
The appearance of a Pareto chart is quite straightforward with vertical bars plotted in decreasing order in relevance to their relative frequencies. The higher the frequency, the greater the impact it will have on your business. The Pareto chart is an excellent way to pinpoint the issues affecting your sales, productivity and overall success of the business.
- Improve Customer Service
Customer support is a crucial aspect of any business so it is prudent to ensure that your customers are satisfied with the customer service they receive. The Pareto Principle indicates that 80% of customer complaints are related to 20% of your products/services, so a proper analysis of which products/services are causing problems for your business can help you to permanently sort out customer service issues. Also, by utilizing the 80-20 rule you can identify which particular customer service staff is associated to the majority of customer complaints so that you can focus on altering the way in which the associated staff interact with customers.
The Pareto Principle is a simple phenomenon that allows us to shift our focus on the areas that will have the most profound impact on the end goal and will yield the greatest results. It is particularly useful for businesses as it allows you to identify which aspects of your business are not performing to their full potential and thus make it easier for you to focus on the issues that require the most urgent attention. The most successful businesses utilize the Pareto Principle to ensure that all operations conducted within the business are contributing to the overall success of the business.
References
- Marshall, Perry (2013-10-09).” The 80/20 Rule of Sales: How to Find Your Best Customers”. Entrepreneur. Retrieved 2018-01-05.
- Koch, Richard (1998). The 80/20 Principle: the Secret of Achieving More with Less. New York: Doubleday. ISBN 9780385491747
- Top 5 Ways the Pareto Principle can Improve Your Business.
