The Pareto Principle, or the 80-20 Rule, is the observation that roughly 80% of the effects come from 20% of the causes. It was named after Italian economist Vilfredo Pareto who observed in 1906 that 80 percent of Italy’s land was owned by 20 percent of the population. In further developing his principle, Pareto observed that in his garden 20% of the pea pods contained 80% of the peas. Business management consultant Dr. Joseph M. Juran suggested the 80-20 principle and attributed the 80-20 Rule to Pareto, calling it Pareto’s Principle. Understanding the 80-20 Rule is vital to your business as you analyze your marketing and develop sales strategies.
When applied to business the 80-20 Rule infers that 80% of your business comes from 20% of your customers, 80% of your sales comes from 20% of your salespeople, and 20% of your staff are responsible for 80% of your production. These are generalized numbers, and may not be applicable in every situation but it allows you to begin good introspection of your current business situation. Your split may be 70-30 or 90-10. The important thing is that this principle helps you identify what is working and what is not within the structure of your company.
As a business leader, you can learn to recognize Pareto’s Principle in effect and identify the 20% of customers, sales, and team members that matter most within your organization, allowing you to focus on those aspects. Prioritizing the 20% can help you organize your day and relieve stress when you are not able to give time to every aspect of your business each day. Even if you only have time to cover the most important 20% in one day, you have upheld 80% of your business for that day. By focusing on the 20% that will make the most meaningful impact to your organization’s goals, you ensure positive results.
The 80-20 Rule applies to your marketing as well as to your productivity. In a given advertising campaign, 80% of your results will come from 20% of your advertisements. Again, by looking for the ads that deliver the most meaningful contribution to sales, you can focus on those, separating out the ones that are ineffective. This is sometimes called Pareto’s Funnel, as you funnel the 20% that works away from the 80% the does not. Identifying the 20% makes it possible for you to spend your limited sales resources in the most effective way.
In practice, the Pareto Principle serves as your daily reminder to focus more on cultivating the 20% within your business, however it should not be taken to mean that since only 20% of your staff produce 80% of your results you can ignore the other 80% of your staff. Instead, you need to focus 80% of your time on what is really important. By doing this you can help the good get better and the great to become superb.
Recognizing the Pareto Principle within your business will help you guide your company to a more profitable future by giving you the opportunity to improve your marketing, identify your best salespeople, and even optimize your daily schedule by focusing your efforts where they matter most within your organization.