The Pareto Principle, better known as the 80/20 rule, has been making the rounds in business psychology for decades. It basically states that 80% of outcomes result from 20% of all causes for a given event. In layperson’s terms, this means 80% of your results should come from 20% of effort, not more. The staying power of 80/20 rule in business comes from the fact that it can help business owners, managers and employees identify and prioritise the most productive and crucial business tasks that yield the best results.
So how do you use the 80/20 rule in business” If you’re already adopting the Pareto Principle in your daily life, are you doing it right?
Understanding the 80/20 rule in business
The 80-20 rule is basically simple cause and effect. 80% of outcomes are from 20% of causes. It all came about when Italian sociologist and economist Vilfredo de Pareto realised that in general, 80% of a nation’s income was in the hands of only 20% of the population.
Extrapolating this concept, Pareto defined a rule that became known as the Pareto Principle, or 80/20 rule, that 80% of results are produced by 20% of causes.
This rule is most often used in business to illustrate that 80% of a company’s revenue is generated by 20% of its customers. This means that businesses would benefit the most from focusing on retaining the 20% of clients that bring in 80% of sales, while attracting new clients similar to the golden 20%. The principle makes it easier to hone in on what matters to the business, and adapt new strategies with a clearer focus.
Pareto Principle: What it essentially means
At its core, the 80/20 rule is about identifying your company’s best assets and using them efficiently to create maximum value. Using the clients and revenue example, identifying the 20% of clients that generate the most revenue for your business can help you plan your sales, marketing and customer experience strategies to keep those clients happy. That doesn’t mean that you drop the 80% of clients or ignore their needs when planning ahead.
This is why the 80/20 rule is often misinterpreted. It’s not a hard-and-fast mathematical law, but a general principle that can help those in decision-making roles streamline their processes.
Examples of the 80/20 rule in business
The 80/20 rule helps managers focus on what is most important and/or urgent to the business. Here are some key examples of how the 80/20 rule can help you streamline your business.
- 20% of customers equal 80% of sales
- 20% of the marketing efforts represent 80% of the results
- 20% of software development efforts account for 80% of the programme’s functionality
- 80% of the quality failures originate from 20% of the tasks
The 80/20 rule and time management
Small business owners are notoriously time-poor. Tasks like running to the post office, or stocking up the pantry with tea and biscuits for the week frequently cuts into the work day and mental space of the small business owner just starting out. In fact, a 2017 study revealed that UK small businesses waste up to 120 days a year (!) on admin tasks.
While these business owners are so caught up on these ‘ £10 an hour’ admin tasks, they end up forgoing the activities that are truly crucial to their business, that could earn them £1,000 an hour (like sending the right email to the right person, for example, or finally fixing a time to meet a potential client).
This is where the same 80/20 principle can come into play. It applies to every dimension of business, including arguably the most important entrepreneurial skill of them all: time management.
Do you use the 80/20 rule in business” Share your experience with us for a chance to be featured in Real Business.