What is the 80/20 Rule?
The Pareto Principle, or 80/20 rule, was first described by Italian economist Vilfredo Pareto in his 1896 paper “The Law of Ration.” He found that 80% of the wealth in Italy was owned by 20 percent of the population. Since then, the 80/20 rule has been applied to various business situations, helping leaders identify the few things that cause poor performance.
The concept is that 80% of your results come from 20% of your efforts. However, the 80/20 rule is not just about results but rather the causes of the results. For example, 80% of your sales are generated by 20% of your clients. The 80/20 rule is not a constant but rather a rough rule of thumb. That is, there may be times when it is 70/30 or 90/10. Nevertheless, the 80/20 rule is why it is necessary to focus on your best clients and products.
How can the 80/20 rule be used in business?
The 80/20 rule is a straightforward idea that can be used in different business situations. The basic idea behind the 80/20 rule is that 80% of your results come from 20% of the effort or input. So, if 20% or less of your customers create 80% of your revenue, then it’s really just about focusing on your top customers and giving them the best buying experience.
Another way is to think about it relates to your business processes. For example, if you are looking at your sales process, you might find that 80% of your sales come from 20% of your leads. So if you improve the quantity and quality of your contacts, you might be able to increase your sales. The key is to think about how it might be applied to your specific business situation.
What are the benefits of the 80/20 rule?
In practice, the 80/20 rule generally means that 80% of your business’s output is created by 20% of its efforts. However, knowing this can benefit your business. For example, companies can use this observation to determine their most profitable products and determine which products have the most growth potential.
The magic 20% that generate 80% of the revenue are often called the “cash cows.” In business, the 80/20 rule can reveal a great deal of lost potential. Having one or two cash cows sounds safe. But, if a company has a whole herd of cash cows, it really shows many products aren’t contributing to the business’s bottom line.
Applying the 80/20 rule to Business Processes
The 80/20 rule has numerous business applications. It many times serves as the foundation for a lean startup business. For example, if you have a website with only a few hundred thousand visitors a month, but only a few thousand of them buy your product. You’ll find that only a few thousand of your customers actually generate the bulk of your revenue. This can help business owners evaluate what’s working and improve their websites by focusing on the user experience of the main customers who generate the bulk of sales.
The 80/20 rule is a great way to audit the overall effectiveness of your business operations. But, it’s certainly not the end-all or only way to measure success. The 80/20 rule is all about understanding where the actual results are coming from and focusing on them. The biggest problem with the 80/20 rule is that people don’t understand how to apply it in business. If you’re interested in discovering more about the 80/20 rule and how it can help your business, contact Cooperata for consultation.