Pareto Principle: The 80/20 rule

Pareto Principle: Using the 80/20 Rule to Grow Your Business

Pareto Principle

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 gist of the 80/20 rule is very simple: there is always an unequal relationship between the effort we expend and results we obtain – split as high as 80/20 in many cases.  Pareto studied multiple examples to establish this principle and in 1906, 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 the ratio is even higher — upwards of 95% in extreme cases.

What Now?

Now that you are aware of Pareto’s Principle, it’s crucial to:
  1. Identify the disparity in your business
  2. Work on leveraging what’s currently working for you
  3. Reduce what isn’t working for you.
For example, if 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 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. Once you’ve identified the disparity, you can begin working to apply some radical changes.

The four key areas to evaluate are:

  • Clients
  • Processes
  • Marketing
  • 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 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.

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