It was named after the Italian economist Vilfredo Pareto, who, in 1906, observed that 80% of the land owned in Italy was owned by 20% of the population.
Since then this 80/20 split has proven to be a common rule of thumb in business; e.g., “80% of your results come from 20% of your clients.”
But what’s most interesting is that it can apply to all areas of all types of businesses.
- 20% of the sales people earn 80% of the commissions.
- 20% of the authors sell 80% of the books.
- 20% of your daily activities generate 80% of your success and income.
And so on…
So how does understanding this principle help you to speed up the growth of your business?
Well to start with, you can use this rule to help improve your cashflow…
80% of your debt will be owing from 20% of your debtors. So focus your efforts on getting money from the 20% of the clients who have the most debt outstanding.
Put a process in place to remind you to chase only the top 20% and you will see a significant improvement in your cashflow, for relatively little effort.
You Can Also Use This To Increase Your Turnover And Profit.
Let me give you an example:
Take a look at your customers for the last 12 months and analyse what they have spent (you can simply put them into a spreadsheet so you can list them by order of how much they spent with you).
You will find that 80 percent of your turnover has come from 20 percent of your customers – e.g. if you made £100K from 100 customers, you would find that £80K came from 20 customers and then the other 80 customers made up the other £20K between them.
I’ve done this time and time again with my clients, and it still amazes me how close this rule of thumb is!
If you do this for your own customer list and identify your best customers – the top 20% – you can then start to offer them a better level of service than you would give to your other clients.
Different service levels? I hear you ask…
In his book “The 4-Hour Workweek” Tim Ferriss discusses the Pareto Principle and recommends you focus your attention on those 20% who generate the 80% of your business, and then goes on to recommend that you fire those 20% who take up the majority of your time and cause the most problems!
You should be treating those customers who are bringing in the majority of your money extra specially, because you want to make sure they stay with you rather than move away to buy from one of your competitors. And there are some ways you can do this…
… but that’s for another blog post!
If you have examples where you have found the 80/20 rule in what you do, or when you go and check this out for your customers over the last 12 months, please share them by adding a comment below!