You’ve probably heard of the Pareto Principle already, but how well do you understand it? Do you use it in your business? This principle, also called the 80/20 rule, the Law of the Vital Few, the Principle of Factor Sparsity, (e.t.c) has often been lauded as a powerful rule in business. It can be applied to almost all areas of business, and to personal life as well.
The principle was first named after the Italian economist Vilfredo Pareto (1848-1923), who discovered through research that 80 percent of the nation’s land was owned by 20 percent of the population. The 20 percent were only the powerful few. Surprised by his findings, Pareto conducted the same research in surrounding countries and discovered roughly the same results.
Although the principle (we’ll call it the 80/20 rule forthwith) was first applied to wealth distribution, it’s been found to be present in other areas as well. Areas such as business, and the multiple facets of business. For your business the 80/20 rule can be applied to sales and marketing, time management, human resources and other profit centred aspects.
80/20 rule in marketing and sales
Generally, according to the 80/20 rule, 80 percent of your sales will come from 20 percent of your customers. The 20 percent will likely be your loyal and repeat customers. These customers are either very loyal to your brand, or highly satisfied with the product, or both. Identifying these customers allows you to focus majority of your efforts on them, treat them even better and give them more reason to love your brand.
Marketing strategist Perry Marshall, has taken the principle even further, putting it on steroids. According to him, the 80/20 rule is exponential and can be applied infinitely. Marshall calls it “the most powerful compound interest on earth”. Let’s say that 20 percent of your customers are responsible for 80percent of your sales. From Marshall’s standpoint, using the exponential power of the principle then 20 percent of that 20 percent is responsible for 80 percent of the 80. That is, 4 percent is responsible for 64 percent of sales. Then take that 20 percent again and start the process over!
By that virtue the 80/20 rule can be applied again and again, and according to writer Dave Lavinsky, the principle can be taken to the third and fourth power if the numbers are large enough. Using your own data, you can discover which customers are responsible for which percentage of sales. Of course the 80/20 rule isn’t restricted to those exact numbers, and it’ll be at your discretion to calculate your own rough figure. It may turn out to be 75/25 for you, or 64/36, and so forth.
80/20 rule in human resources
Employees hardly ever produce the same levels of work. Some employees are better performers than others. We all know of those brilliant individual who produce stellar work. That’s the 20 percent. The rest of your employees will produce good, but standard results. Identifying your high performers allows you to give them an even bigger platform or tools to better enable them. This doesn’t mean you should ignore the rest of your employees, or value them any less, but rather provide room for everyone to grow, whilst enabling your top performers.
80/20 rule in time management
The principle could be one of the most powerful management tools around. True to form with time management 80 percent of your productivity will come from 20 percent of your efforts, i.e. 80 percent of the outputs come from 20 percent of the input. Assess your productivity and identify the tasks which give you the majority of the results. This allows you to focus deeply on the tasks that produce the most results first, instead of spreading your time thinly.
The Pareto Principle abused
That being said, the 80/20 rule is sometimes grossly abused, or applied where it doesn’t fit. Let’s take applying the principle to HR for instance, it’s easy to neglect the rest of your employees and bloat the egos of your high achievers. Poor strategies in implementing incentives for high achievers could breed a toxic culture in the organisation. It’s also worthy of note that the principle is not a law, rather a general rule that should be applied with some discretion. As a savvy business person, you should be able to tell when to apply the principle with sufficient data to back you up, and when to leave it alone.