Editor
Whether or not you’ve heard of it by name, you’re likely somewhat familiar with the concepts brought forth by the Pareto Principle. Also known as the “80/20 Rule,” the Pareto Principle indicates that 80% of the output of a situation stems from 20% of the causes.
Where Does the 80/20 Formula Comes From?
Naturally, this isn’t a hard and fast rule. Unlike Newton’s Laws of Motion, or Einstein’s Theory of Relativity, there isn’t a grand mathematical equation to demonstrate how this principle fully works.
In fact, for some situations, the divide might actually be 90/10 or 60/40. But all told, there are many situations in life in which observers agree that the majority of the benefits, consequences, or issues that need attention are caused by just a small percentage of the overall population.
That’s great, but what can we do with this observation?
Well, in our never-ending question to “work less and do more”, knowing that the majority of our business is coming from just a small selection of the thousands of things that grab at our attention every day can help us narrow down which irons to grab out of the fire at which moment.
Much as the phrase “work smarter, not harder” indicates, knowing where to put the most effort at any given time can prevent long term burnout, and increase overall productivity and ROI.
What Exactly Is the Pareto Principle?
The Pareto Principle gets its name from Italian economist Vilfredo Pareto. In the late 1800s, Pareto observed that 80% of the land in Italy was owned by just 20% of the population.
He broadened his gaze to other regions, and found that this 80/20 split was an accurate portrayal of land ownership in many other areas, as well.
The concept extends beyond land ownership into areas like wealth distribution, profit generation, and beyond. Very rarely does the input and output balance.
You might find that 20% of your staff can be credited with 80% of your most profitable sales. 20% of your products are involved with 80% of your returns or customer complaints. 80% of your overall profit can be attributed to the top 20% of your customers.
Again, the division might not be exactly 80/20, and it may look slightly different from month to month, depending on your industry and customer base. Remember, this is a principle based in observation, not mathematical precision.
How Can I Incorporate the Pareto Principle in My Business?
Approaching business success from an 80/20 point of view can be pretty revealing. Consider applying the concept to a variety of areas in your business.
For example, let’s look at your most profitable sales of the past month, quarter, or year. Look at the top 80% of your profits.
You may find that a select few customers are responsible for those consistent sales. If your business offers gamification features or membership tiers for a certain service, you’ll likely find that the most lucrative package has been purchased by just a small percentage of your overall customer base.
Meaning 80% of your biggest sales come from just 20% of your subscribers.
Look at your products, as well. What items are the most popular? You may find that 80% of your sales are the same 20% of your inventory.
The reverse of this is also true: you may find that when customers contact you to express concern about a product or request a return or refund, it’s the same 20% of your products that get 80% of the complaints.
Read also: Minimum Viable Product (MVP) – Meaning, Purpose and Benefits
Day To Day Activities Review and Refinement
Even more fascinating, you may find that 80% of your profit comes from 20% of your overall job duties.
Running a business includes juggling many spinning plates at once, as the saying goes, and while 100% of your job duties are necessary, perhaps you aren’t putting the largest portion of your time and energy to the outlets that matter.
For example, how about your time management? What do you spend most of your time working on? And furthermore, what ads, products, or offers have the highest ROI?
By drilling down into these productivity figures, you may find that you spend 80% of your time on that which yields only 20% of your profit, or that 20% of your ads net 80% of your gains, and so on.
Using the Pareto Principle to Work Less and Do More
Now, there’s also a very famous saying that you shouldn’t put all of your eggs in one basket, and while that saying is also not necessarily backed by science, most investors, business people, and financial experts agree that there is significant wisdom in the practice.
If 20% of your clients are producing 80% of your revenue, then you should absolutely increase your focus to ensure those individuals are satisfied customers who will continue purchasing your products and services for a very long time to come.
At the same time, you don’t want to ignore or isolate the remaining 80% of your customer base just because they aren’t big spenders.
Instead, consider your priorities. Frequently, we get bogged down in certain decisions or actions that may not make as wide of an impact as we think they’re going to.
If you spend 80% of your day working on 20% of your marketing and ad campaigns, you’re definitely working more and doing less.
The Pareto Principle allows business owners to prioritize and delegate. If 20% of your staff is responsible for 80% of your sales, then you’re onto something good here.
But that means that the remaining 80% of your staff can be put to work generating new leads, following cold leads, and brainstorming to improve overall sales tactics and methods.
Read also: Customer Lifetime Value. What is CLV, and how to measure it
Does It Work With Advertising?
The same goes for your ads and marketing strategy.
If 20% of your ads are drawing in 80% of your leads, that gives you a great indication of what’s working and what isn’t. You can secure a more robust presence in the ads that are generating good leads, while limiting your experimental or low-performing ads.
Applying the 80/20 in Real Life
Consider applying the Pareto Principle to any type of list or ranking in your business.
What are your top ten ad campaigns? Two out of those ten are going to be more important than the rest of the eight combined, according to the 80/20 rule.
Are you embracing the Agile working methodologies? What are ten things you absolutely have to get done today? Two of those tasks will be more significant to the wellbeing of your business than the remaining eight bundled together.
By putting the majority of your attention, efforts, and time towards those items that produce the greatest number of rewards, you have the ability to work less and do more.
Aiming the majority of your resources towards the highest producing areas isn’t working harder, it’s working smarter.
