# HOW TO USE THE 80:20 PRINCIPLE TO DIAL-UP THE EFFICIENCY OF YOUR BUSINESS

You may have heard of the Pareto principle – it’s more commonly known as the 80/20 rule and it’s a great tool to help you think about your business in a different way.

It’s basically a law of nature that was discovered by Vilfredo Pareto in the late 1800s. He was an economist and discovered that 80% of the land in Italy was owned by 20% of the population.  He was also a keen gardener and discovered that 20% of his pea pods produced 80% of his peas.

The Pareto Principle is also a law of business and if you give it some thought, you’ll probably recognise one of the following:

• 80% of your sales come from 20% of your customers
• 80% of your profit comes from 20% of your products
• 20% of your products cause 80% of your problems
• 20% of your staff cause 80% of your headaches
• And so on.

Once you recognise this you can use this principle to help make good decisions.

But before I explain I should point out that it’s not always 80:20. It could be 90:10 or 70:80 or whatever. The point is there’s invariably a vital few and a trivial many.

The graph below shows the cumulative sales by customer for a client I recently worked with. He owns a service business and was unhappy with his profit. It shows a similar distribution to many other businesses.

By way of explanation what I have done is ranked clients by sales value from biggest to smallest and then plotted a cumulative total.  In this instance the largest  83 customers (20%) generated \$1. 9m (90%) of sales. Equally important is that the smallest 296 customers (71%) generated only \$75K (3%) of sales.

This simple analysis led my client to ask some questions:

• What is the cost of servicing 71% of my customers?
• Is this 71% where most of my headaches come from?
• Am I actually making money from these customers and is it worth it?
• How much easier would my business be if I was more selective in the jobs I undertook?
• How much more time would I have with my family if I downscaled my business?
• Could I make more money for less effort?
• What would be the implications of changing my pricing structure for these clients?

And

• Holy crap! – All my marketing is targeting that 71%!

So you can see that this simple exercise, which didn’t take very long, opened up a whole can of worms.

But don’t you think it was worth it?