We all know about the 80-20 rule but do we really understand it? It’s easy to mention it and sound like you know what you are talking about but if you delve deeper I believe you will be amazed at the truth behind such a short statement.
So what is the definition of the 80-20 rule?
80-20 Rule Defined
If you go to wikpedia you will be able to learn about the founder of this extraordinary finding – Pareto, and how it came about. The rule itself is defined as:
“for many events, roughly 80% of the effects come from 20% of the causes”
Pareto discovered that in his home country, Italy, 80% of the land was owned by just 20% of the population. He then found out that when he planted peas in his garden, out of all the peas he harvested, 80% of them had come from 20% of the pea pods!
Since then there have been numerous studies into this 80-20 rule and on average this rule… ruled!
So did you know that this rule is true for all areas of life? Let’s look at a few examples:
1. World population, 80% of the population reside in 20% of the countries.
2. In the gym, 20% of your effort will achieve 80% of the results.
3. In business, 80% of your revenue comes from 20% of your customers.
4. In manufacturing, 80% of the faults are due to 20% of the design.
In reality it is not always exactly 80-20, it might be 97-3 or 88-12 – the important point to take away is that the biggest impact, will be due to a small input.
Have you ever heard this phrase “the minority always ruin it for the majority”? That is the 80-20 rule in play.
Using The 80-20 Rule In Your Business
In all aspects of your business the 80-20 rule will also be in play. Once you get your head around it you will be able to use this rule to your advantage!
The thing about the 80-20 rule is that the rule exists naturally – without any external influence. However, it you implement or force a change you can in fact change the rule! So you can use the rule for your own benefit and focus in on the areas that are causing most of the desired results.
Let’s take a look at some examples.
80% of your sales will generally come from 20% of your customers. If you know and understand the demographics of these particular customers then you will be able to focus your efforts on targeting more of these particular customers.
So you can remove a huge amount of effort and still get the same results,
You can put the same amount of effort in – but now targeted effort – and get even more results.
80% of your profits will be due to 20% of your products. If you understand what those products or services are then you can provide more of the same. So increase the amount of those services or increase stock of those products.
With information marketing or digital products where stock is irrelevant, then use the 80-20 rule so that you offer the most profitable products to your customers first to maximize your initial sales.
If you outsource your work to various people then 80% of the return will be due to 20% of the people. See if you can come to an arrangement whereby you give more work to those productive members of your team or give them the most profitable tasks!
80% of your complaints will come from 20% of your customers. This is why it is sometimes better to lose a customer than keep hold of one. Time is money as they say.
I remember reading a book a while back and in it there was a situation whereby one customer was taking up an awful lot of time from the customer service team. When the manager invested it turned out that this customer was taking up 80% of their time but contributed to less than 20% of the sales. In the end they decided to stop going out of their way to pacify this customer and made it clear that if they didn’t like it then they could go elsewhere.
The customer stopped complaining but continued to do business with the same company!
So how can you apply this to your business?
Take a look at your business processes and see which steps you can apply the 80-20 rule to. You will need to test the various steps to see what is accounting for the bulk of the results that you want or don’t want.
Once you have an idea of the areas that are accounting for the majority of your results you can decide to remove inefficiencies and wasted time and focus your energy and efforts on those parts which are making the biggest difference to achieving your goals.