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Put the 80/20 Rule to Work in Your Business

Jul 28th, 2015

You may have heard of the 80/20 Rule at some point.  But have you thought about how this simple, but powerful, rule may be applied to your business?

The 80/20 Rule has interesting origins.  Back in 1906, Vilfredo Pareto, an Italian economist, published research findings that 80 percent of Italian wealth was owned by just 20 percent of the population.  Others recognized that the “Pareto Principle,” as it was originally called, held true in a wide array of situations:

How does the 80/20 Rule apply to your business. Research it.

How does the 80/20 Rule apply to your business? Research it.

  • 80 percent of fish are caught by 20 percent of anglers
  • 20 percent of growers yield 80 percent of the harvest
  • 80 percent of church collections come from 20 percent of church members

It’s important to point out that the figures aren’t always precisely “80” and “20.” So, it will often be more appropriate to say that “roughly” 80 percent of X is generated by “about” 20 percent of Y.  More correctly stated, the Pareto Principle says that a relatively small portion of the inputs will generate a relatively large portion of the outputs.   The actual figures may be 70/30 or 90/10, but in general the figures hover around 80/20.  And if you take the time to do the research and crunch the numbers, you may be surprised at how often the figures do come out close to 80 and 20.

So what significance does the 80/20 Rule have for your business?  Do some research and see what you can learn.  If you find that roughly 80 percent of your sales are generated by just 20 percent of your sales force, what will you do?  You might decide to provide more (or better) sales training to the 80 percent of sales people who are producing at relatively low levels.  Or because the 20 percent are so important to your business success, you might provide bonuses to keep them from leaving and going elsewhere.

Here are a couple other examples:

  • Let’s say a business owner finds that a very large percentage of her store’s profits are derived from a relatively small percentage of its products. She will want to make sure there is always sufficient inventory of these products, and she may want to step up promotion for products from this group to boost earnings even more.
  • You recognize that more than 80 percent of sales are coming from less than 20 percent of your customers, AND the latter figure has decreased steadily during the past several years. You’ll probably want to make some changes, like giving this important group of customers special treatment.  You should also work on strategies to avoid becoming too dependent on a declining number of customers, like profiling these key customers and stepping up efforts to find more prospects with similar traits and needs.

The 80/20 Rule can also be a useful time management tool.  The rule says that, if you have a to-do list with ten items, it’s likely that only one or two of them will be very important.  Identify those critical activities and focus attention on finishing them first to get the most from your efforts.

Put the 80/20 Rule to work for your business.  Every business is different.  Start by finding out which activities are responsible for the greatest portion of hoped-for results.  Then take actions to get the most out of desirable situations and to avoid those with negative consequences.

For more information, or to explore ways in which the 80/20 Rule might be used in your business, contact your regional office of the Indiana Small Business Development Center.