27th December 2019
The 80/20 Rule
What is the 80/20 rule?
The 80/20 rule is a very basic principle that can be applied to virtually any area within your business and also your personal life.
As well as being called the 80/20 rule it is also known as the Pareto principle, the law of the vital few and the principle of factor sparsity.
It is named after the economist Vilfredo Parito who published the study noting that 80% of the land in Italy was owned by 20% of the population. Although legend has it, he first became aware of the 80/20 theory when 20% of the pea plants in his garden produced 80% of the healthy pea pods. He then went on to think about wealth and a variety of industries and realised he could apply the theory across the board.
Perry Marshall who has written a book called 80/20 Sales and Marketing which explores even deeper into the 80/20 rule. Looking at the 20% of your clients that make up for 80% of your sales. He looks at the fact that within that initial 20% the 80/20 rule still applies. This means that the top 20% of your initial 20%, which works out at the top 4%, represent a whopping 64% of your sales.
Let's take a look at a few more examples:
20% of the olympic athletes win 80% of the medals
20% of patients equate to 80% of the healthcare spending
20% of the work you do gets you 80% of the credit you receive from your boss
20% of criminals commit 80% of crimes
And some personal examples:
80% of the time you wear 20% of the clothes you own
80% of the time you drive on 20% of the roads in the city you live in
80% of the time you eat 20% of the food available to you
80% of the time you spend with 20% of the people in your friendship group or family
So how can you apply to 80/20 rule to your business?
Look at the different departments of your business and work through them one by one. We will look at marketing as an example...
You will be able to apply the 80/20 rule here. You will find that 20% of your marketing strategies will be the ones pulling in 80% of the leads.
Once you have identified which strategies are working for you, you can use them to increase traffic to your website and pull in more leads and not waste time on the other elements of your marketing strategies that aren't really working. It is a great tool to see which parts of your business are functioning best.
Google analytics is a great tool for identifying the strongest pulls for new leads. The data is free, collected for you, and then delivered to you in the form of helpful charts, easy to understand stats and bite size pieces of information. Google analytics is handing you your 80/20 rule data on a plate.
Another interesting part of your business to look at with the 80/20 rule in mind is your team. I am sure certain team members have already sprung to mind when thinking about the 80/20 rule. Usually your top sales person will bring in the majority of of business rather than just their proportion.
Making the most of the 80/20 rule
To really make the most of the 80/20 rule within your business you need to identify your 80/20 goals:
- What parts of your business do you really want to focus on?
- What parts of your business are the most profitable?
- Which parts of your business are the easiest to run?
From here you can create 80/20 goals. And apply the 80/20 rule to your goals. Because the likelihood is 20% of your goals will bring you 80% nearer to where you want to be.
Then look at the actions you are going to take to achieve these goals.
Small business owners can often get themselves in the mindset that they need to be working 80 hours a week and slaving away within their businesses to be a proper start up entrepreneur, but this doesn't have to be the case.
Successful entrepreneurs learn how to put in the least effort for the maximum results. And you know how they do this.... the 80/20 rule! Even if they aren't thinking of the rule constantly, they are subconsciously using the formula that we now know so well.
Effort and Results
Looking at the chart above let's explore the relationship between effort and results a little more and how the idea stems from the 80/20 rule.
Where the arrow hits is the perfect point on the chart. I bet you can't find anyone who would rather put in more effort and have less results! The mind set of many entrepreneurs and the learnings we are taught from a very young age at school is the more effort you put in the more results you get. Which to a point is true but doesn't always have to be the case.
For instance, if you work in a job where you trade your time for money eg, a a shop assistant. Then you will need to put in more hours (effort) to earn more money (results).
However as an entrepreneur you should not be trading your time for money, you should be building a business where your business is earning money whether you get out of bed or not. And this will move you onto the sweet spot on the chart above.
- Low effort and Low Results: This could be studying last minute for an exam at school or work.
- High Effort and Low Results: This could be focussing on the wrong part of the 80/20 rule and putting a lot of effort in to something that doesn't produce well for your business. Like wasting lots of time on your least valuable client.
- High Effort and High Results: This could be throwing a lot of time and money at a huge marketing campaign to attract those middle of the road customers and bringing lots of new business in.
- Low Effort and High Results: This could be something as simple as a quick phone call to one of your best clients securing a large sale.
Identifying where to use the rule
It is a good idea to look back at previous successes and failures with your life and business and it will soon become clear where you were using the principles of the 80/20 rule without being aware of it.
Once you make yourself aware, you can then use it in a much more productive way than when you were using it subconsciously.
Although the 80/20 rule may be universal, it is always a good idea to give it some flexibility. It's ok if it ends up being the 72/28 rule or the 85/15 rule, it doesn't have to be rigid.
The best way to evaluate where to use the rule in your private life is to look at different categories. You can decide on the categories that suit you most. They may include:
- General Wellbeing
You can then start looking at the areas you want to focus on that will benefit you the most. Just focus on one or two and once you highlight the areas that you can improve by implementing the 80/20 rule you can go onto other areas.
Once you have spent time learning about the 80/20 rule it is a really good idea to look at some planning techniques too. Check out this fantastic blog about Planning For The Year Ahead
Don't forget to check out the Academy for so many more resources, business and cake related.