“Any business model will benefit from looking at the Pareto Principle”
Pareto Principle and the Rule of 80/20
Any business model will benefit from looking at the Pareto Principle throughout your analysis and growth. There are so many factors that play into productivity of any business, and the 80/20 rule will allow you to analyze things more accurately and adjust for the purposes of exponentially increased results. Although the theory was developed in 1897, it is still equally applicable today in the digital age, and it could change the trajectory of your online business’ success forever.
The idea of the principle is that 80% of outputs come form 20% of inputs and that creates an imbalance in your business efforts and the amount of payoff for those efforts. There are many ways to deal with this problem, but the starting point is the need to understand what that actually means. It could mean that 80% of your sales are being achieved by 20% of your staff, or that 80% of your technical problems are coming from 20% of the necessary updates to your system. There are three main ways that this rule seeps into your business, and you need tools to deal with each one as well as to understand how each one impacts your bottom line.
1. 80% of penalties come from only 20% of origins.
This will normally manifest itself through technical challenges and that can mean several things. If you have a production line to build the products that you are selling, you may have equipment that is malfunctioning. If you rely significantly on your digital equipment like computers or telephones then you may have some bugs that are causing crashes or failures throughout the network. Typically speaking, 80% of the problems that you are experiencing in these areas of your business are all connected to 20% of the actual causes that are creating these disruptions.
Regardless of what the causes or problems are, taking a look at that 20% can increase your productivity in huge ways. Resources can be scarce in business, and focusing them on the area where you will get the highest payoff is the only way to allocate those resources effectively. Being strategic about solving that 20% of problems will remove that big 80% of technical difficulties that you and your team have been dealing with and it will feel like a huge weight has been lifted. Once that is out of the way, you will have more flexibility to come up with creative solutions for the issues that may remain.
2. 80% of results come from only 20% of time and labor.
This is where motivating your team and inspiring more growth will be critical. If you have a fantastic business model and sales team, then you may see that only 20% of their effort and time are going to 80% of your business success. That is not necessarily a bad thing but it can also indicate some issues that are not necessarily good either. You want the majority of effort and time being expelled by your team to be productive and you want as much of that time and effort to result in conversions for your growth.
If only 20% of your time and effort is producing that many results, then you should be looking for ways to leverage the remaining time and effort that exists to create even more results. That means that two different things need to be analyzed. Firstly, you need to look and see how much more time can go towards growth and whether or not there are enough resources to direct towards that in regards to number of employees, number of work hours, inventory of products, etc. You also need to analyze what other processes are taking up your employees’ time and how to streamline that. If ordering was done online, would there be more time to close sales? If you have a sales coordinator hired, how much more time could the field sales team spend on increasing profits to make that hire worth the money? These questions could result in doubling or tripling profits with these kinds of percentages!
3. 80% of earnings come from only 20% of goods and patrons.
This is where all sides of your business tie together and allow you to look more holistically at how to increase productivity. If you are only leveraging significant profits from 20% of your products and customers then that means you are carrying a significant amount of dead weight. You need to analyze whether or not the relationship with each customer is continuing to be beneficial both for your business and for the client. You also need to see what products could be put to bed and how those resources could be allocated to developing a new and more effective product.
This is an ongoing practice for any business owner and it can be applied to all aspects of it. If you are running marketing campaigns and see that only 20% of the keywords from your ad campaign are generating 80% of the traffic, then you need to stop wasting dollars on the keywords that are falling flat. If you see this type of imbalance in budgeting or manufacturing or any other part of your company, then you will be able to pivot and redirect those resources to areas of your business that will actually thrive.
Your business needs constant attention to get off of the ground and continue towards consistent growth. There are so many factors that play into how successful your business is at any point in time, but keeping a close eye on how the Pareto Principle is impacting the productivity of your company will be a great way to keep tabs on things regularly. As long as you are always looking to reduce the imbalances of the 80/20 rule in your company, you will always find new ways to save money and effort and refocus your time and energy onto things that will give you a higher payout.