The 80/20 rule, also called the Pareto principle or the law of the vital few, states that approximately 80% of the effects come from 20% of the causes. Or put another way, 20% of your efforts produce 80% of your results. As a small business owner or manager, it’s important for you to understand how the 80/20 principle works and how it affects your employees, customers, products, and sales.
How the 80/20 Rule Applies to Your Business
Identifying and and optimizing various 80/20 situations helps your business’ bottom line by boosting its productivity and efficiency. So how can you apply the Pareto principle to your business?
One invaluable 80/20 rule application is in your marketing efforts. Put simply, you first analyze your marketing channels to determine where the bulk of your results come from. Then, you focus on these channels to drive results. For example, when you analyze your marketing tools, you realize that social media provides about 80% of your customer stream. As such, you focus your marketing funds on social media, at the expense of print marketing campaigns.
As an entrepreneur, you may find your marketing initiative increases the number of buyers and boosts your overall sales. But even then, your profits may remain flat or even decline. It could be that 20% or so of your customers generate the bulk of your revenue and profits. It’s important for you to know where your profit originates. When looking for insights into your particular profit situation, you may have to apply the Pareto principle and focus on a select few customers.
If you have employees, you need a deep understanding of how your organization works. This helps you figure out what motivates your employees and gives them the most satisfaction. The Pareto principle may help you determine the tools that influence your workers’ satisfaction levels. Perhaps ask yourself what you can do to increase employee satisfaction and keep employees on task. Myriad ways exist to boost employee happiness, including boosting employee engagement, providing a positive work environment, and rewarding and/or recognizing worker contributions. Out of all these factors, you may find that providing a positive work place drives 80% of your employees’ job satisfaction.
You may look at your sales force and realize only 20% of your sales team brings the majority of your business. It might be useful to recognize the difference in performance and give the best performing staff the high-productivity tools they need to maximize performance. But what should you do with remaining staff? You might consider holding meetings to discover what how to increase the productivity of the 80% of your staff that falls behind. You may also provide training for those workers or pair them the best performing sales staff.
The 80/20 Rule and Your Customers
The 80/20 guide can help you come up with effective business solutions for your company, including focusing your resources and attention on customers in your top 20% and improving your time management performance. Some of these solutions include:
- Identifying your best customers: It helps to keep close tabs on your client list to determine who spends the most, buys in bulk, and has made recent purchases.
- Noticing your customer niches: Some customers love certain products or exhibit specific shopping behaviour. With the 80/20 rule, you can easily tell the select 20% of your products that 80% of your customers like.
- Delighting your best customers: Remember to keep your best clients in sight when you seek out new clients. The Pareto principle shows you your high-volume and consistent buyers, so offer those customers discounts and interact with them on a personal level to keep them content.
The Bottom Line
In business, 80% of the profits may come from 20% of the products, or 80% of revenues may come from 20% of the clients. When you do an 80/20 analysis on your revenues, you can identify time-wasting products or clients and take appropriate actions. Used in this fashion, the Pareto principle helps you achieve more in your business with less effort.
Are you a small business owner looking to improve your company’s time management processes and productivity or looking for payroll tools to help you with employee paycheques? If so, the QuickBooks Self-Employed app helps freelancers, contractors, and sole proprietors track and manage their business on the go. Download the app now.