Successful business owners are savvy. They are smart enough to know the right areas to divert time and resources to achieve their business goals. For instance, instead of trying to do too much, they focus on the few important tasks that guarantee better results. They understand the 80/20 rule or as it is also called, the Pareto principle.
So, what is the 80/20 rule, and how can it help you accelerate business outcomes?
In a nutshell, the 80/20 rule is an observation that most things in life are not evenly distributed. It helps businesses achieve their goals by identifying the high-impact tasks that yield the most impact.
In this article, you will learn about the Pareto principle, its origin, its advantages, and how to apply the rule to your business.
What is the 80/20 Rule?
The 80/20 rule or Pareto principle estimates that 20 percent of inputs account for 80 percent of outputs. This principle is applicable in many areas, including business and economics, education, wealth distribution, productivity, personal life, and professional life.
Some 80/20 rule examples include:
- 20 percent of the students in a given school tend to score grades of 80 percent or greater.
- 20 percent of our efforts spent on tasks account for 80 percent of our productivity.
- 20 percent of codes are responsible for 80 percent of bugs.
- 20 percent of your company’s social media posts yield 80 percent of your web traffic.
- 20 percent of sales account for 80 percent of inventory usage.
In business, the Pareto principle helps you identify potential high-value tasks and prioritize them. For example, if you discover that 20 percent of your sales reps bring in 80 percent of your sales, you can focus on empowering that 20 percent so that they can continue to produce their best work. You will also encourage the other 80 percent reps to follow in the footsteps of their
How the 80/20 Rule was Formed
The 80/20 rule or Pareto principle is used in Pareto analysis, a decision-making tool for identifying an organization’s problems and strengths.
The 80/20 rule was first applied in macroeconomics in the early 20th century to describe wealth distribution in Italy. It was introduced in 1906 by Vilfredo Pareto, an Italian economist known for the Pareto efficiency concept.
Pareto discovered that 80 percent of the peas in his garden were from only 20 percent of the pea pods. He extended this principle to macroeconomics by showing that 20 percent of the population owned 80 percent of the wealth in Italy.
In the 1940s, Dr. Joseph Juran, a leading expert in the field of operations management, applied the 80/20 rule to quality control for business production.
He revealed that 80 percent of product defects resulted from 20 percent of the problems in production. If a business focuses on rectifying 20 percent of the problems in production, it could improve its overall product quality. Juran called this phenomenon “the vital few and the trivial many.”
Addressing the Misconceptions
People usually misconstrue the “rule” in the 80/20 rule to mean a set-in-stone law. The Pareto principle, however, is more of an observation. While little scientific study supports or disproves this theory, there is enough anecdotal evidence to show its validity.
Second, the percentages of the input and output don’t necessarily have to sum up to 100. What matters is the concept behind the rule. For instance, instead of 80/20, it can be 75/20 or even 80/15.
Also, there is a misconception that since the 20 percent is seen as the most important, no need to focus on the other 80 percent. This is wrong. While there is a priority area, other areas are also important.
For example, even if 20 percent of your customers make 80 percent of your company’s revenue, it doesn’t mean you abandon the other 80 percent of your clientele.
Benefits of Implementing the Pareto Principle in Your Business
There are several ways the Pareto principle can help boost your business. They include the following.
Increase productivity
The Pareto principle can effectively show you where to focus your efforts and resources for maximum impact. This rule allows you to focus on the vital 20 percent responsible for producing the 80 percent result.
Most of the time, we focus too much on non-urgent or important tasks during the workday, such as redundant meetings or administrative tasks. These activities hinder you from attending to higher-priority matters that can yield results, especially if you are a small business.
For example, Pareto teaches that instead of spending too much time handling employee remuneration, you can invest in an automated business payroll system or another payroll ledger example. This speeds up and simplifies the process of calculating and distributing salaries, taxes, and deductions. As a result, it gives you more time to focus on more critical business activities.
Also, the Pareto principle can help you discover the reason your team is unproductive. You can then deploy the rule to find the 20 percent of the reason for the lack of productivity.
Higher ROI
Most times, the reason you are not making enough profit is because you are focusing on the wrong areas. The Pareto principle corrects that. It allows you to work on the right areas (the 20 percent) that can lead to positive business outcomes.
For example, applying the rule may reveal that only 20 percent of your team members are hitting their targets. This information now leaves you with a decision to make.
Do you invest more in that 20 percent, or do you channel more resources to improving the 80 percent that are currently underperforming? The answer will depend on your business goals. But either way, the Pareto principle would have given you the information to boost your ROI.
Better approach to marketing
Speaking of profit, that is mostly tied to how well your business gets its marketing spot on. Even if you have the best product, you won’t make enough money if no one sees it.
Effective marketing enables you to educate customers, keep them engaged, establish a good reputation, and strategically sell to them. The Pareto principle can help you achieve this.
It can help you understand how to get the most out of your marketing assets, such as your website and email. For example, using the 80/20 rule, 20 percent of your web pages are responsible for 80 percent of your traffic. That means these are the pages you need to focus on when assessing site navigability and user engagement.
Implementing the Pareto principle allows you to target your marketing and optimize your strategy, making it easier to elicit feedback from your audience.
Identify and fix major problem areas
The Pareto principle isn’t just about showing you the right areas to focus on and improve business outcomes. It can also help you spot the areas where things are going badly.
Then, you can prioritize the problems and see which ones make up the 20 percent that is likely to affect your business the most. This way, you can find the appropriate approach to tackle the issue.
Suppose you have discovered that customer reviews are hurting your business. In that case, you may implement the 80/20 rule. This rule may then you realize that the confusion of sales and customer support departments accounts for 20 percent of the issues most likely to affect your business. This can be due to siloed data across different systems and departments.
One approach to tackling this issue is data governance. But what is data governance? It is the process of managing the availability, usability, and security of data in an enterprise.
Data governance defines common data definitions, formats, and structures, allowing organizations to integrate and consolidate data from multiple sources.
Enhance customer experience
The importance of a positive experience for your customers cannot be overestimated. It can define whether or not you stay in business.
According to the Pareto principle, 80 percent of customer complaints are due to 20 percent of your product catalog. This information allows you to focus on developing or refining that product correctly.
You can also use the 80/20 rule to optimize the performance of your customer support team.
Identify which 20 percent of your team members are causing 80 percent of your customer service complaints. Use a customer center as a service (CCaaS platform) to analyze agent performance, including call handling times and customer satisfaction metrics.
This way, you can discover the vital 20 percent that are performing or underperforming and address the situation. In no time, your customer satisfaction rates will increase significantly.
Applying the 80/20 Rule in Your Business
The 80/20 rule can be a life-changing principle for your business if well executed.
To implement the 80/20 rule, identify your top business priority based on your short and long-term goals. Ideally, the sweet spot for 80/20 priorities is somewhere in between. A task won’t drive results if your priority is too small. And if the priorities are too big, there is a risk that the process will become complicated and unmanageable.
However, your priorities will likely be determined by your industry and the size of your business, among other factors.
Here’s what we mean: Imagine you run a software company, and you plan to roll out five new products. You have data to make a case for each, and you present it to your team. The next step for them is doing their analysis to determine the top-priority products.
This involves market research and analysis, determining consumer needs and trends, and evaluating the competition’s offerings. They even deploy Apache Hive to help them make informed decisions.
But what is Apache Hive used for in this context? Well, first, Apache Hive is a data warehouse infrastructure built on top of Hadoop that provides data summarization, query, and analysis. In this context, it allows the team to process and analyze large datasets and perform complex queries to extract valuable insights for their market research and analysis.
Finally, the team suggests that two of the products would boost sales and revenue while the other three are useful but unlikely to gain as much traction.
Implementing the Pareto principle, you will ensure that the team dedicates the most time and resources to promoting these two products. You would also charge the product development team with continually improving these products. Marketing will also have to bring their A-game to ensure that the messaging and campaigns resonate with the target audience.
This doesn’t mean the other three products will be abandoned. But because those two are the vital 20 percent, more time and resources are dedicated to them,
As a result, you get the best business outcome because you have applied the optimum input across all possible choices.
Final Words on the 80/20 Rule and How it Can Optimize Your Business Performance
The 80/20 rule is a powerful principle that can help you identify high-priority tasks in business and personal life. It also helps you avoid wasting time and resources on activities that will not yield results.
In terms of business, the Pareto principle can help improve productivity and profit, and enhance your customer experience. It can also help you identify high-priority problem areas, so you can find the appropriate solutions.
However, the 80/20 rule doesn’t suggest that you abandon the less-priority tasks. The idea is to focus on the most important tasks that would yield the best results. Afterward, you can start to shift your attention and allocate your time appropriately for maximum efficiency.
Before implementing the 80/20 rule, understand your top business priority. Then, you can use it to improve business outcomes.
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