July 7, 2020 | 5-minute read (1025 words)
If you feel like there’s never enough time in the day to accomplish everything you want, you could be focusing on the wrong areas. One way that many entrepreneurs stay productive on a daily basis is to use the Pareto Principle, also referred to as the 80/20 rule. Essentially, the 80/20 rule is all about identifying and prioritizing the activities that help you reach your life and business goals. You can apply the 80/20 rule to everything you do in your life and business.
The main point of the Pareto Principle is that each unit of input (effort, time, strategy) contributes to a specific output (revenue, productivity, efficiency). This rule states that 20 percent of your actions or inputs will account for 80 percent of your results or outputs for any given event. It suggests that you should prioritize your efforts on those 20 percent of high-value tasks (goals and strategies) that can produce the best results. According to this principle,
- If 20 percent of customers contribute 80 percent of profit, focus on satisfying these customers.
- If 20 percent of bugs cause 80 percent of crashes or errors, fix these bugs first.
- If 20 percent of the products contribute 80 percent of the sales revenue, optimize those products first.
Entrepreneurs can apply this rule to their businesses to achieve the following results.
- Price a product appropriately (in a multi-product company)
- Boost profitability, enhance productivity and increase efficiency
- Improve time management by prioritizing problems, goals, and objectives
- Elevate quality control through identifying root causes
- Allocate time, effort, financial processes and human resources effectively
Now that you’ve got a handle on the Pareto Principle, consider the following ways to apply it in your business.
How Can the 80/20 Rule Boost Profitability?
The 80/20 rule suggests that roughly 80 percent of your business revenue (profit) is likely to come from 20 percent of your customers (clients). Based on this proposition, you can apply the rule for customer profitability analysis in the following steps.
Step 1: Identify the most profitable customers by grouping 20 percent (high revenue-generating customers) together.
Step 2: Put together a profile of your top clients and start looking for the type of client who fits the profile so you can have an overview of this high-profit customer.
Step 3: Focus more on the 20 percent of your clients or customers that make up 80 percent of your revenues. Retain such clients, market to them and acquire new clients with a similar profile.
Step 4: Shift customer purchases toward higher-margin products and service lines and discontinue unprofitable customer segments.
How to Use the Pareto Principle in Pricing Products
Typically, approximately 80 percent of a company’s sales revenue comes from about 20 percent of its products or services. A firm dealing with multiple products can adopt more sophisticated pricing methods for those 20 percent of products that jointly account for 80 percent of total sales revenue. For the remaining 80 percent of products, the firm may use a cost-based pricing method.
How to Apply the 80/20 Rule to Optimize Business Networks
Business owners can take advantage of the 80/20 rule to reach their target audiences faster while drastically reducing the time and effort required. They can also use the following steps to focus on the 20 percent of investors that provide 80 percent of their business funding.
Step 1: Identify the 20 percent of your marketing tactics that help you to reach the maximum (80 percent) target audience. Also, find out the 20 percent of your marketing messages that account for 80 percent of your campaign results.
Step 2: Develop your marketing campaigns with 20 percent effective content. Focus more on the marketing channels and strategies that help you to reach your target customers or clients faster.
Step 3: Figure out your customers or investors who benefit you most, and focus your time and efforts on developing and maintaining relationships with them.
How to Apply the Pareto Principle to Enhance Productivity
You must have clarity about your vision before prioritizing your tasks. You can effectively apply the Pareto Principle in the following steps to set your goals that can optimize your overall productivity.
Step 1: Identify and prioritize goals that would have the highest impact on your life. In business, apply the 80/20 rule to identify inputs that are potentially the most productive and make them the priority.
Step 2: Identify your productivity constraints and do something every day that enables you to overcome those constraints.
Step 3: Start your day by working on the top 20 percent of high-value tasks. Focus on becoming competent at doing the most productive things in your field that contribute to 80 percent of your results.
How to Apply the Pareto Principle to Improve Time Management
Apply the 80/20 rule to use your time efficiently and effectively by implementing the following steps.
Step 1: Identify the 20 percent of projects, tasks or commitments on your to-do list that you need to complete to hit the majority (80 percent) of your goals.
Step 2: Once you identify the factors that are critical to your business’ success, focus more on the key result areas of your chosen field. Use your effort and time to prioritize the tasks that are most important to your business growth. Also, take time to analyze and eliminate the high potential errors or risks to your business.
Step 3: Spend your time doing the activities that will help your business grow and delegate the less-productive tasks. For example, outsource back-office responsibilities like managing accounting, HR and finances that take 80 percent of the time and need related skills. You can hand off such tasks to someone else and use the available time to concentrate more scaling your business.
Remember, the numbers 20 percent and 80 percent are not exact statistics, just estimations. No need to worry if the figures at your firm are not exactly 80 and 20 percent. Your ability to identify and focus on the top 20 percent of tasks will determine your quality of life and the results you’ll be getting.