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As an entrepreneur there are always 100 hats you can wear. When the business is young and your time is limited, it’s important to focus on the right activities that will help you grow quickly and minimize distractions.
As the business grows, you want your bottom line to grow with it, and you’ll quickly realize that a majority of the effort you put in doesn’t result into a majority of the sales or revenue.
In fact, 80% of the results often come from just 20% of the efforts. This is known as the Pareto Principle, and it can help you drastically increase your productivity, sales, and business.
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What is the Pareto Principle?
Also known as Pareto’s law, Pareto’s rule, the 80/20 rule, the law of the vital few, and on and on.
The Pareto principle states that for many events approximately 80% of the effects come from 20% of the causes. I’ve found that this can be applied to almost anything in life and business.
The law is named after Italian economist Vilfredo Pareto (1848–1923), who used the principle to study income distribution and land ownership in Italy and found it generally held true there. The Pareto principle then expanded and popularized by management consultant Joseph M. Juran, who applied it to business management; helping companies identify their key performance indicators (KPI’s).
Who was Vilfredo Pareto?
Vilfredo Pareto was an Italian economist, though born in Switzerland. He studied mathematics and physics, but later became an engineer and worked on railways and ironworks.
His first written work, Cours d’économie politique, is where he first really made a name for himself with his law of income distribution, which was highly controversial. It was a complicated math formula where he tried to show that income distribution and wealth in society was not as random as many thought, and was something that had been an issue all throughout the history of the world and in all societies.
It was in this work that he mentioned the 80/20 rule, or what we now know as the Pareto Principle. Pareto argued that about 80% of the land in Italy was owned by 20% of the total population.
Pareto went on to study sociology and publish even more theories about social classes, welfare economics, and others, never knowing the success his first work would bring him after death.
It wasn’t until 1941, when a quality management consultant named Joseph Juran came across Pareto’s work. He found this mention of the 80% of land being owned by 20% of the population, and realized that it applied to many more things than just Italian land ownership. He was a quality issue manager and realize that 80% of the problem with the products he was studying were caused by just 20% of causes.
Juran preferred using the phrase “the vital few and the useful many” as a way to make sure that, while they only accounted for 20% of the issues, people shouldn’t just ignore the remaining 80% of the causes.
Why the Pareto Principle is so Important
The Pareto Principle is completely counterintuitive. You would think that 80% of your efforts make up 20% of the results, because you instinctively feel that the more work you put in the more output you get. And that is true in a sense, but in reality it’s when we focus on the few things that drive the most results that our work has more of an impact.
In a way, it sucks because you realize that most of what you’ve been doing hasn’t been getting you much of the results. It’s only a small percentage of your work that really moves the needle.
There are a few ways to visualize the Pareto principle. Here is a quick diagram I came up with (it’s super sophisticated, I know).
While a diagram might not be as visually helpful, the Pareto chart is a better way to represent the principle.
You can see the results are on the left side, and most of those come from only a small percentage of the effort you put into something.
You can replace results with problems and effort with causes. It’s the same concept as in the above chart, but just shown differently.
Applying the Pareto Principle
You can apply the Pareto principle, or 80-20 rule to just about anything. Here are some examples of life and business situations where the 20/20 rule can be super helpful.
The Pareto Principle in Business
The Pareto principle is amazing when you put it to use in your company. Especially if you’re starting a new business, or creating a new product or service to offer customers.
When you have little time to focus on something, you quickly realize what the important things to do are, and what can be left for later. As you grow your business, you can start implementing some of those things that weren’t part of your initial 80/20.
- 80% of your customers will come from 20% of the channels you use
- 80% of your revenue will come from 20% of your products and services
- 80% of customer complaints will come from 20% of issues
- 80% of your results come from 20% of your efforts
- 80% of the reason you fail at your diet comes from 20% of your bad habits
- 80% of your output comes from 20% of your input
Whenever I bring on a new client, I’m always looking for the 80/20 when it comes to their business situation. I find the marketing strategies will drive the more prominent results first, and leave the others for later.
While there are a ton of options when it comes to marketing, I wouldn’t recommend a local bakery try create “viral” content on TikTok when they don’t even show up in their local area when someone is searching for a bakery to go to.
Once they nail the basic marketing strategies, we can move on to those incremental ideas that could help, but might be a waste of time.
While virtually every industry and team can implement the Pareto principle, there are some major ones where this makes sense:
- Software development/engineering – which software bugs are causing most of the issues?
- Sales – 20% of the sales team drives 80% of the sales
- Marketing agencies – 80% of sales comes from 20% of the advertising
- UI or UX Teams – 80% of users use 20% of the features you build
- Customer Service – 80% of the issues you hear about are caused by 20% of the problems
- Project Management – 20% of the work will lead to 80% of the results
- Health organizations – 20% of the causes lead to 80% of the deaths
The Pareto Principle in Time Management and Productivity
One of the most important things for an entrepreneur or someone on a management team is being productive. Everyone wants to be more productive these days, so how can the Pareto principle help?
A few times a year I like to track my time and see what I’ve been focusing on and what’s actually driving results for my business.
Did I spend 50 hours that quarter focusing on something that actually didn’t help move my business forward?
Did you have a goal you were trying to reach but didn’t get there? Were you creating content that isn’t bring in more customers or growing your brand?
Take a look back and see where you could have better spent your time, and focus on those things moving forward. So you get kind of an inventory of where you spent your time, and then step back and see what results those actions drove.
Start 80/20-ing Everything
Now that you know about the Pareto principle, you’re going to recognize it everywhere.
So it’s time to start implementing it into your company. Here are some questions to help think through some of the common ways you can make business easier on yourself:
- Where are your clients getting the most value? Can you double down on those 1-2 things that really bring you happiness and make your clients come back for more?
- What issues are hindering your productivity? If I were a gambling woman, I’d put my money on social media and email as the top 2 things that are probably causing 80% of your procrastination.
- Which clients are taking up most of your time? It might be time to either fire some clients or transition your product offerings.