While at the University of Lausanne in the late 19th century, Italian engineer and economist Vilfredo Pareto observed that in his native Italy, 80% of the land was owned by 20% of the population. Intrigued by the distribution, Pareto turned his attention to other countries and discovered that this mathematical spread remained roughly the same.
In fact, what has come to be known as the Pareto Principle turns up in countless ways throughout the human-made world. (And maybe even the natural world, too. I did find reference to a pair of ecologists from France and Australia who found the Pareto Principle in the grazing habits of zooplankton.)
The principle certainly applies in software, where, in general, 80% of a project’s code can be written in 20% of the allocated time (while remaining code — the most difficult — sucks up 80% of coders’ time). In 2002, Microsoft figured out that by fixing the top 20% of user-reported bugs, they’d resolve 80 per cent of system errors.
The principle also turns up in taxation, where 80% of the taxes collected generally derive from the highest-earning 20% of the population; in global economics, where 20% of the world controls 80% of its resources; and in health care, where roughly 20% of the people use 80% of the health-care resources.
While it’s not a law (purists will be quick to tell you it’s actually an observation) the Pareto Principle is a pretty compelling breakdown that is replicated in myriad systems.
Applying the Principle
Now that I’ve drawn you a quick sketch of how this weird mathematical principle shows up in the wider world (Google it and you’ll discover a slew of tips from 80/20ing your marriage to streamlining your grocery shopping), let’s look at how you can jump forward in your business by applying an old principle.
- Focus on your key customers
Don’t concentrate on the hundreds or thousands who purchase your product once or twice, but on the few who make big buys on a regular basis. These are your bread-and-butter customers — the 20% who drive 80% of your bottom line. Quit futzing around trying to engage and convert the lukewarm among your clientele. (Yes, that means looking closely at how many person-hours your company spends on that unquantifiable black hole called social media). Instead, spend time making sure your key clients are satisfied and that you’re recognizing them for the trust and value they find in your relationship. Learn as much as you can about them — then go find more customers like that.
2. Read Essentialism: The Disciplined Pursuit of Less
Written by U.K.-born tech CEO and business consultant Greg McKeown, Essentialism shoves you up close to the uncomfortable fact that you can’t be everything to everybody — and neither should your company. Figure out which 20% of your business’s activities are driving 80% of your successes, and do more of that. (Essentialism is essential reading for anyone who feels like their to-do list is too long, regardless of your interest in applying the specifics of the 80/20 rule.)
3. Let go of things in the zone of diminishing returns, especially if they don’t align with your vision
This might be painful, but look closely at that 80% of your non-essential products, offerings or processes. If you’ve got a product with a deep history and only a fringe following, consider axing it. When Laurie Schultz of Vancouver-based ACL (a global risk management, compliance and audit software firm) became CEO seven years ago, she set about decommissioning those things that, despite being large revenue lines for the company, ultimately weren’t strategic or beneficial over the long term. Instead, she focused on growing that smaller slice of ACL’s best offerings — and put all the other stuff on the chopping block.
4. Learn the principle inside out for best application
In his book 80/20 Sales and Marketing: The Definitive Guide to Working Less and Making More, marketer and business consultant Perry Marshall describes how the Pareto Principle behaves exponentially. If 20% of your clients make up 80% of your revenues, the 80/20 rule applies within that 20%. That means the top 20% of your top 20% of your customers (the top 4% overall) deliver 64% of your sales. (Want the math? That’s 80% times 80%.) This helps you figure out which customer base to focus on developing. Marshall goes into much greater detail in the book, teasing out the 80/20 rule as it applies to your salespeople, your employees and your departments. “When you know how to walk into any situation and identify the 80/20s, you can solve almost ANY money problem,” Marshall writes. He’s selling it for just one cent at his website, too — worth a look.
It All Adds Up
We’ve only scratched the surface of the Pareto Principle, but I think you can see the value. If you take the time to thoroughly understand it and how to apply it, you’ll reap the benefit of knowing how to leverage significant results from just a little effort.
Sounds like next-level thinking to me.
Alex Van Tol works with organizations to shape and communicate their brand stories. From real estate to tech, she uncovers what makes organizations tick — and what can help them grow.
This article is from the April/May 2019 issue of Douglas.