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The Pareto Principle, also known as the 80/20 rule, is a concept that states that roughly 80% of effects come from 20% of causes - which means that 20% of the things that you do are actually responsible for 80% of the outcomes.
This principle was first discovered by Vilfredo Pareto, an Italian economist, in 1896. Pareto observed that 80% of the land in Italy was owned by 20% of the population. Later, this principle was applied to various fields, including business - and I can promise you this: If you start examining your numbers you will most likely find that this also applies in your business and life at large.
How can you observe the Pareto Principle in your business?
The Pareto Principle will impact your business in many ways. If you start digging into your numbers, you will find that
- 80% of your revenue is actually generated by 20% of your customers
- 80% of your sales come from 20% of your marketing efforts
- 80% of your complaints will be made by 20% of your customers
It literally applies in pretty much every area of your business.
How can you apply the Pareto Principle in your business?
So, knowing this exists is one thing. We’re all about taking something away from this and applying it to our life and business. So here are some ways in which you can apply the 80/20 rule in your business.
Identify your top customers
You also know that I love data, because we can only build a successful business if we’re looking at our numbers. So, go through your finances and identify your 20% of your top customers - once you look at the amount of revenue these people generated you will probably find, surprise surprise that this is 80% of your revenue.
So, who are these top customers?
Ask yourself questions about them, about their businesses or their lives, or the work they do, where they found you, how you connected with them etc.
This will help you to hone in on your target customers more and more, which means that your marketing and sales will get better and better over time.
I have used this quite successfully with one of my clients by making sure we have a reward strategy in place for those super-customers that come back time and time again. We created coupons and special sales that were only available to our best customers. With that we managed to increase the customer lifetime value over time.
Identify your top products and services
Use this principle to identify your best selling products and services. You will find that 80% of your profit will come from 20% of the work you do - so which are your products and services that are most profitable? Once you know that, you can focus on delivering more of those and therefore increase the revenue in your business.
Again with one of my clients we ended up shutting down more than 50% of her offers because they did not offer enough value to her customers AND they weren’t really providing any profit to the business. They were merely generating work for the team and there was nothing in it at the end.
Streamline your business operations
Every business has processes that make sure things get done. Whether that is writing a blog post, doing a video or recording a podcast. Now the thing is 20% of these processes are the ones that make sure 80% of your results are being achieved. With that you can look a where you are spending time on things that aren’t really important and you can course correct accordingly.
Identify which marketing efforts are working - and which aren’t
You can use the data you have gathered to figure out what is working in your marketing and what is not. Where did your best customers come from and HOW did they find you. Where are you spending your time? Maybe you’re doing a podcast and that takes 80% of your time but isn’t really generating results because most of your clients are coming through affiliates. So the 20% of time you spent on setting up an affiliate program is now generating 80% of your results, so imagine how much MORE results you can get when you switch your attention to what is working.
Improve your customer service
The top 20% of your customers are the ones that need support. Find out more about HOW they like to feel supported and what else they need from you, your team and your business at a whole. If you do that, then you will retain them within the business longer which means that the customer lifetime value will go up. Don’t fall into the trap of only dealing with the people that shout loudest and complain in your inbox. Focus on helping the people who are the ones that are actually PAYING you and are doing to regularly.
Invest in your top-performing team members
Productivity in teams is an interesting topic and worth it’s own post, but as you can tell the pattern persists. 20% of your team members are generating 80% of the results in your business. Identify who are the people that actually move the needle within your business and reward them - and consider to take action on the ones that are not by coaching and supporting them, moving them into a role where they can be more successful, or letting them go if need be.
Focus on partnerships that bring value back to the business
Who are the people you have connected with that are bringing benefits back to your business? Is it people from your mastermind? Is it some of your customers that are not top affiliates? Focus on growing and nurturing the relationships with THOSE people - as well as finding more people similar to them to continue growing your business.
Fix your sales processes
Only 20% of the things that you’re doing in your sales process are responsible for 80% of the results, if you can identify those, then you can majorly simplify the process, which is a more pleasurable experience for you and your customers and may also be saving significant amounts of time for your team. PLUS you can make sure that you get better at doing those things, therefore bringing in more sales in return.
As you can see there are a lot of different ways in which the Pareto Principle plays out in your business. That is the reason why marketing is actually only useful IF you’re basing your action on actual data - and not how you FEEL about things. You could have employees you really like, but if you actually check what you’re paying out and what you’re getting back as a result, you may find that they’re actually not contributing to your business growth - or even worse costing you money right now - but they make you feel good.
That’s why I’m always banging on about the importance of clean data.
How are you going to apply the Pareto Principle in your business?