Does your wardrobe consist 20% of clothes you only wear 80% of the time? Does your food pantry contain 20% ingredients you use for 80% of the dishes you make? How about your handyman (or woman’s) toolbox – are 20% of the tools used for 80% of the odd-jobs? The 80/20 rule is rife across all aspects of our day to day lives.
Many of us live our lives with some form of regiment or structure, whether that’s ensuring we only spend a strict 38 hours each week in the office, switching off our tech before bedtime or maintaining a terrific work / life balance. But what about ensuring that 80% of your outgoings come from 20% of your input when it comes down to business?
What is the 80/20 rule?
Also known as the Pareto principle, the 80/20 rule was outlined by Italian economist Vincent Pareto in the late 1800’s. Pareto discovered through his research that the economic climate of Italy at that time meant that 80% of the country’s wealth was owned by 20% of the population. Pareto became interested in this level of distribution and applied his theory to other countries – finding the same level of results.
Pareto’s theory was examined in closer detail in the 1940’s by Dr Joseph M. Juan, who universalised the principle, labelling it “the vital few and trivial of many” – the idea that 20% of something is always responsible for 80% of the results. Dr Juan widened the Pareto theory and applied it to other areas of life, including business and economics.
People often assume that the greater the input, the greater the output. The 80/20 disproves that general notion and is regularly utilised in business management. The rule can be applied when decision making, managing performance and time management, for example.
The 80/20 rule in business
Do 20% of your clients produce 80% of your revenue? Are you able to identify which 20% of resources (staff) are accounting for 80% of your sales? The 80/20 rule can be applied to many areas of businesses – whether you’re a freelancer, micro-businesses owner or contractor.
It’s been regularly suggested that 20% of customers are responsible for producing 80% of a business’s income. You could say that’s a great statistic and as a business owner a step forward would be to identify the core demographics of that 20% – age, gender, location etc – and target your marketing and sales efforts toward that client pool, therefore potentially increasing revenue.
Applying this theory to your marketing efforts could also save you money. Whilst it’s important to market toward both potential leads and prospects for your business, knowing specifically who out of your regular pool of customers to effectively market toward could save you both time and cash.
However, specifically targeting and putting your resources into that 20% client group – whether that’s fostering new client relationships or nurturing existing ones – could also be detrimental to your business. What if that 20% is made up of one or two clients who both decide to cease business with you? Losing one client could mean losing half of your business.
If you do identify that 80% of your revenue is coming from 20% of your customer base – how can you positively influence the 80% who aren’t buying much from you? Whilst this actively goes against the 80/20 rule, it’s worth keeping in mind that focussing mainly on one revenue stream can be detrimental to your cashflow.
So, the 80/20 rule depends on the size of business?
In a nutshell, possibly.
Think about the dispersion of your customers before making any drastic marketing decisions based on the 80/20 rule. If you have a large client pool, identifying those high-rollers who spend, spend, spend with you could help boost business. However, if your client pool is small it might make more sense broadening your marketing efforts outward instead of targeting the 20% of customers who make up 80% of your profits.
Whilst revenue is a much-discussed application of the 80/20 rule, there are other areas of your business the theory can also be explored with. For example, do 20% of your staff account for 80% of your problems or concerns – e.g. sickness, bad attitude, lateness and so forth? Could you use the 80/20 rule to identify which 20% are causing the issues?
On the other side to this idea, do 20% of your staff account for 80% of your sales? As business owners is there a way to nurture this talent and help improve your revenue?
The 80/20 principle can help grow your business – whether that’s taking on a more steady, high paying client group or assessing who in your team is the sales talent and helping to coach or mentor them to achieve more growth. Whilst it can’t be always used to “fix” problems, it’s a good theory to consider when managing your business.