The Pareto Principle: How The 80/20 Rule Will Change The Way You Do Business
Stop wasting time on things that don’t matter.
Business leaders can use the Pareto Principle to drive focus, improve productivity, and change how they do business for the better. In this post, we discuss the 80/20 rule and outline how you can use it to stop wasting time on things that don’t matter.
What is the 80/20 rule?
The 80/20 rule, also known as the Pareto Principle, is an economic principle that states that 80% of the effect comes from 20% of the cause. It suggests that you can expect 80% of the impact of something to come from only 20% of the input.
In the context of business, this means you can expect 80% of your revenue to come from 20% of your customers. It also applies to adverse events – like loss in productivity.
Italian economist Vilfredo Pareto developed the principle in around 1906. Pareto observed that 20% of Italy’s population owned 80% of the land. He then proposed that this 80/20 principle could be applied to other areas of life.
Since then, people have used the Pareto Principle in business and other areas such as sports, education, management, and human resources. Some even apply it to their personal life in the context of time management.
Benefits of Implementing the Pareto Principle
The Pareto Principle can be a crucial guiding principle, both in business and personally. After all, it can help you identify and act on high-impact tasks instead of wasting time on things that don’t matter.
If you are a business owner, the Pareto Principle can be a key component of your company training programs, human resource management, marketing strategy, and financial decision-making. When applied to different areas of your business, you unlock gains that promote growth.
The Pareto Principle In Practice
Here are some ways companies factor the 80/20 rule into different facets of business:
Maximising profit
- Identify your top 20% of customers responsible for 80% of your sales. Then analyse their buying characteristics and find ways to increase business with them.
- Consider paring down your product lines and focus on the lines that generate about 80% of your revenue stream.
- Identify which 20% of your team generates 80% of your gross sales. Hone their marketing skills but also focus on training the remaining 80% of the sales force to increase sales (and revenue).
Improving customer service
- The Pareto Principle says that 80% of your customer complaints stem from quality control issues involving 20% of your products. Therefore, identifying these products can improve quality control and increase customer satisfaction.
- It also says that 20% of your customer service representatives are mishandling about 80% of customer complaints. Identifying them and knowing the source of complaints allow you to tweak training methods and supervisory processes.
Reducing overhead
- You can use the 80/20 rule to reduce your overhead by identifying the 20% of items that comprise 80% of your operating expenses. Savings from these items have a significant and direct positive impact on your bottom line.
Improving productivity
- The Pareto Principle says 80% of decisions (and impact) will come from 20% of the meeting. So you can use the principle to decide when a meeting is worthwhile.
- Have employees focus on mission-critical tasks (the 20%) that produce 80% of your ‘results’ – or revenue. This drives focus and encourages employees to focus their efforts on vital tasks.
5 Key Steps To Implementing The Pareto Principle
Implementing the Pareto Principle can help your business streamline its efforts and processes to ramp up productivity and profitability while reducing risk. Here’s how to get started:
Focus on what matters most.
If you focus on the 20% of your efforts with the highest impact, your business will see the biggest gains. You should spend more time on the activities that bring you the greatest return.
Prioritise tasks based on importance.
To ensure you’re spending your time wisely, prioritise your tasks by importance. Start with the highest priority tasks first. Then move down the list until you finish each task.
Eliminate distractions.
If you find yourself being pulled away from what matters most, try these tips to stay focused:
- Block off time every day when you won’t be interrupted. Make this a habit by putting this ‘uninterrupted time’ in your calendar and prioritising it. Remember, this forms part of the 20% of your efforts which generate 80% of your results.
- Turn off notifications on your phone.
- Use a timer to track how much time you spend on each task.
Set goals.
Once you have identified the high-impact tasks and listed completing them as goals, break them down into smaller steps. Then, set realistic deadlines for completing those tasks. This helps you focus on the big picture without getting distracted by minor details.
Measure progress.
How will you know when you’ve reached your goal if you’re not measuring your progress? Set up a system where you track your progress every day. You might use an online calendar, a spreadsheet, or a simple to-do list.
Ask us how to streamline your business processes, boost productivity, and reduce risk using the Pareto Principle.
