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Home » New Here, Productivity

How to get big results: 80/20

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.

Sound familiar?

Now, imagine that you looked at your business and your life through the lenses of two questions:

  1. What are the 20% of sources which account for 80% of my problems?
  2. 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?

Empire Building Kit

11 Comments »

  • James M said:

    The 80/20 rule can be twisted and used effectively in other ways, as well. The Primal Blueprint (www.primalblueprint.com) philosophy of eating has people focus on eating healthy for 80% of the time, and have a 20% allowance for times when you can’t be so strict about diet (ie traveling, visiting your grandmother, Thanksgiving). As long as you stay strict 80% of the time, you will see results (I’ve lost 35 pounds since June mainly from a shift in diet and walking, nothing else).
    James M´s last blog post ..Anil Dash- The Thrill of Blogging

  • Rod Watkins said:

    Great a post. I see this over and over in business. All the management and busy work, the time for endless meetings, but nobody bothers to identify the key business drivers. Take sales. Sales managers make lots of noise about making quota but nobody asks the #1 sales person how he gets his leads. Maybe if they spent their time replicating that more people would make quota. More companies need leverage the 20%.

    Matthew Needham Reply:

    Hi Rod, I think we’re all guilty of it at some point. Especaily during times of stress. Taking time out can focus the mind. You’re right. Very few business people take the time to usnderstand what works and what doesn’t. So don’t get the results they really need. There’s a term for that. “Busy Fools”.

    Thanks for taking the time to contibute to the conversation Rod.

    Matthew

  • Rob Cubbon said:

    I really loved reading Tim Ferriss’s book and I was particularly taken with the 80/20 principle. Good post
    Rob Cubbon´s last blog post ..Marketing your business with a website and social media

    Matthew Needham Reply:

    Hi Rob, yes Tim’s book is great. Are you going to get his new one? I think he illustrates it well, because ultimately it led him to his 4 Hour Work Week. Thanks for commenting.

    Rob Cubbon Reply:

    Actually, Matthew, I probably will buy his next book which, I think, is something to do with diet and fitness. Bit of a different topic but one that interests me. He actually put me onto Michael Gerber and the E-myth book which was another really useful book for me (and one you’ve mentioned here as well, I see). So, I will probably always keep an eye on what Mr Ferriss is up to!
    Rob Cubbon´s last blog post ..Marketing your business with a website and social media

  • Jazz Salinger said:

    Hi Matthew,

    I’ve read about the Pareto Principle before and I understand the concept. I’ve just never taken the time to sit down and apply it.

    So, I’m still running around like a mad thing trying to get everything done and failing miserably.

    This time I’m actually going to take some time and do it. It will be very interesting to see the results.

    Thanks for the reminder to work smarter and not harder.

    Matthew Needham Reply:

    Hi Jazz, thanks for commenting here. I find with a lot of entrepreneurs know that they have to do things, such as 80/20, but don’t have the time to do it. It’s so true you’ve got to invest up front to get big results. I’m sure you’ll get a lot out of it. Good luck.

    Matthew

  • Ben said:

    Pareto Principle is such a great principle to work with.

    I’ve tried it with my blog posts before where I looked at the kind of posts that got the most traffic and engagement then created more content like that

    Nice round up Matthew
    Ben´s last blog post ..4 Must Do Steps for Moving Forward When Your Goals Aren’t Working

    Matthew Needham Reply:

    I think that there is a danger of applying it to blog posts especially if you cover a broad niche, which could in turn take you down a more narrow niche. For example lots of people are interested in making money online, so these posts get a lot of traffic. You need to balance what drives traffic, with what converts to sales. For example you could end up writng about popular stuff, but it doesn’t make you any money. Thanks for the comment here though Ben. Glad to see that you’re making use of the 80/20. It’s certainly very powerful.

  • Timo Kiander said:

    Matthew,

    80/20 rule is very important for every entrepreneur.

    Especially, if you are building your business on the side, while having a day job, focusing on just essentials is very important.

    It takes some practice though to realize that “right 20%” to focus on. Anyway, once you are willing to test different ways of working and track the results, you start to see what works and what not.

    Cheers,
    Timo
    Timo Kiander´s last blog post ..Weekly Productivity Tip #8: Optimize your habits