The 80/20 rule – How can it work for you?
The Pareto principle also known as the 80–20 rule, Management consultant Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto who, while at the University of Lausanne in 1896, published his first paper “Cours d’économie politique.” Essentially, Pareto showed that approximately 80% of the land in Italy was owned by 20% of the population; Pareto developed the principle by observing that 20% of the pea pods in his garden contained 80% of the peas.
In business, it is usually applied as follows: 80% of your company’s profits will come from 20% of your customers. In essence, 80% of whatever outcome you’re expecting will come from 20% of whatever you put into your project.
Why is it so important?
Using the 80/20 rule allows you to focus your business planning in a way that will allow you to maximise profit, production, or any other aspect of your business, with a minimum of effort.
80% of profit comes from 20% of customers
It would make sense to focus on making sure that 20% of your customer base is happy before expending resources on the rest. The same thing can be applied to any situation, it doesn’t always come out to 80/20, but the basic concept still applies.
This same rule can be applied to marketing, profit predictions and many other business aspects can also be applied to time management and other things that you use every single day, whether you realise it or not 80% of your results should come from 20% of your effort.
It’s easy to be pulled into projects around your business that aren’t going to be terribly productive and the 80/20 rule is a great rule of thumb but it isn’t set in stone. It’s a useful guideline and should be used as such.
Don’t try to lock everything you do into that 80/20 ratio or you’ll find yourself striving for something that is impossible to achieve. That said, take a look at the various aspects of your business, and see how you could benefit from implementing the rule. You’ll be surprised at the amount of extra time and productivity you can obtain with a little change of perspective.
If you need help with your business plans and would like an outside perspective get in touch, we are more than just accountants and take great joy in working with our clients to grow their business.
Image courtesy of GWTNext