In the early 1900s, Italian economist Vilfredo Pareto observed that 80% of his harvested peas were produced by 20% of his peapods. With this observation, his theorem was then applied to land ownership in Italy. He saw that 80% of the land was owned by 20% of the total population. Through his observations that the 80/20 distribution occurs frequently, the basis of Pareto Principle was born.
The Pareto Principle says that in most situations, roughly 80% of effects come from only 20% of the causes. Rather than suggesting you work less, the Pareto Principle indicates you can better manage your time and focus on things that matter most by allowing the smaller things to slide. Essentially, the theory can be applied anywhere, but specifically; here are some ways it can greatly benefit your business.
1. Increase Productivity
Individual employees can utilize the 80/20 rule to prioritize their tasks so they can focus on the critical 20% that will produce 80% of the results. As a manager, you can use the Pareto Principle to identify the 20% of causes that result in the 80% of non productive activities occurring in the department. With this information, you can take appropriate measures to resolve the issues causing them.
According to the 80/20 rule, 20% of a company’s customers account for 80% of your sales. If you are able to distinguish who your top 20% of customers are, you will be able to narrow your target market. This makes it easier to find more customers similar to them in order to dramatically grow your sales and profits. Moreover, this rule can be applied to your sales team. In this case, you can make the decision to either nurture the 20% of sales people who bring in majority of the deals or train the other 80% so they can develop their skills and become better at closing deals.
The Pareto Principle indicates that 80% of a company’s leads are often generated by the top 20% of its marketing initiatives. Company’s continuously want to reduce their cost of customer acquisition, which means increasing the number of leads generated per dollar spent in marketing. In order to accomplish this goal, you can see how the 80/20 rule applies to your business to lean out your practice. You will better focus your efforts on creating more quality and effective marketing initiatives.
4. Customer Relations
Customer support is crucial to all businesses. Therefore, it is imperative that you ensure your customers are always satisfied with the service they receive. In regards to the Pareto Principle, 80% of customer complaints are related to 20% of your products/services. Running a proper analysis on what products/services are causing problems for your business can help you permanently sort out customer service issues and ensure the customer is getting the service they were expecting.
5. Identify and Fix Problems
Applying the principle to your business will allow you to prioritize and understand problems impacting the outcome of any situation. Organizational tools, such as Pareto charts, you can identify problems and take appropriate actions to resolve critical business issues.