Vilfredo Pareto was an economist who discovered that his law of income distribution, which identified that 80% of the income and wealth was produced and possessed by 20% of the population, could also be applied outside of economics. “Pareto’s Law” or “Pareto’s Distribution” is more commonly known as as the “80/20 Principle”.
This 80/20 Principle can be summarised as follows: 80% of the outcome is derived from 20% of the inputs. Sometimes, the ratio is skewed to 90/10, 95/5 or even 99/1, but the minimum ratio to seek is 80/20.
Many entrepreneurs slave away with long days, 7 days a week, feeling completely overwhelmed with the sheer amount of work they have to complete. Calling suppliers, calling customers, processing orders, organising shipping, dealing with complaints. The task list is endless. Which is usually dealt with by getting up an hour earlier and going to bed an hour later, just to get things done. But no matter how many hours they work there are never enough hours in the day to get everything done, let alone focus on growing the business.
Now, imagine that you looked at your business and your life through the lenses of two questions:
- What are the 20% of sources which account for 80% of my problems?
- What are the 20% of sources which account for 80% of my desired outcomes?
Then by answering these questions you can find the problems and start eliminate them and your strengths and do more of them. Wouldn’t that be useful to you?
Tim Ferriss in the The 4-Hour Workweek describes how when he applied these principles he stopped contacting 95% of customers, fired 2%, leaving him 3% of customers to profile and replicate.
“Out of more than 120 wholesale customers, a mere 5 were bringing in 95% of revenue. I was spending 98% of my time chasing the remainder, as the aforementioned 5 ordered regularly, without any follow up calls, persuasion or cajoling.” Tim Ferriss in The 4-Hour Workweek
He then goes on to describe some amusing stories where he ‘fires’ several obnoxious and demanding customers.
His net result?
“I went from chasing and appeasing 120 customers to simply receiving large orders from 8, with absolutely no pleading or phone calls or email haranguing. My monthly income increased from $30k to $60k in 4 weeks and my weekly hours immediately dropped from over 80 to approximately 15”
The 80/20 principle can literally be applied to dozens of areas in your business
- Products – which 20% of your products account for 80% of your sales?
- Customers – which 20% of customers account for 80% of your sales?
- Affiliates – which 20% of affiliates account for 80% of your sales?
Being overwhelmed can be as unproductive as doing nothing, but with 10 times more stress. If you’re selective and focus solely on the important things and ignore the rest, then you’re well on the road to being productive.
If you think about it, lack of time is really a lack of priorities. If you take the time to sort the wheat from the chaff, then you’ll actually become far more productive.
What do you think – have you applied Pareto’s law to your business?