You may have heard the business mantra “work smarter, not harder”. It refers to the concept of finding systems and processes to make you more efficient. It also recognises that the effort you put into a small number of crucial tasks yields the highest returns for your business.
Have you heard of the 80/20 principle? If you haven’t then you are in for a treat. This principle can transform your business and your life. If you have heard of it, hopefully you’ll get some new ideas for how powerful it is to apply.
It’s curious that such a widely accepted principle of doing business should have originated in the 19th century. Vilfredo Pareto was an Italian economist who discovered that income distribution was skewed between the population, so that 80% of the wealth was owned and controlled by just 20% of the people.
Today this observation has become known as the 80/20 rule and also called the Pareto Principle after it’s inventor.
What is the Pareto Principle (the 80/20 Rule)?
The Pareto Principle can be stated and re-stated in many different ways but with a common theme. Here are a few variations:
- 80% of revenue is generated by 20% of customers
- 80% of results are due to 20% of the actions
- 80% of income is earned by 20% of the products
- 80% of time is spent is spent with 20% of people
- 80% of money is spent on 20% of household items
- 80% of features account for 20% of use
- 80% of emails are opened by 20% of the list
- 80% of website traffic is driven by 20% of keywords
- 80% of your stress is caused by 20% of your customers
- 80% of the results of a sales team will be created by 20% of the team
- 80% of new customers comes from 20% of advertising sources
and on and on…
Now, it’s important to note a few details about the 80/20 rule:
- The ratio doesn’t have to be exactly 80-20. In fact the statistics could be skewed even more in some cases – 90/10, or even 99/1
- The Pareto Principle is not a law, just a rule of observation. That is to say, this is how things generally are in the world
- It works ‘recursively’, meaning that if 80% of your revenue comes from 20% of your customers then if you take that 20% and split THEM into 80/20 as well you will find that 20% of that 20% are responsible for 80% of your 80% or more simply stated, 64% of your revenue comes from an important 4% of your customers. Special note: Even if this is NOT currently the case in your business, you’ve got an awesome opportunity here.
The 80/20 has been proven to be remarkably accurate in describing the cause and effect relationships between elements in business and life.
Why is the 80/20 Rule So Useful in Business?
One of the greatest eye-openers of the 80/20 rule is that it makes you realise and see the imbalances in life. And once you see these imbalances, you can start to find the specific actions that result in the highest business success.
When you become aware of the 80/20 rule in your business, you can:
- Identify the 20% of your customers who are making you 80% of your revenue and focus on them.
- Conversely: consider getting rid of the 20% of your customers who are responsible for 80% of your stress if they are not also part of those that bring you the most revenue.
- Find out who your best employees are (the 20% that are responsible for 80% of your results) and focus on rewarding them
- Conversely: Consider what you can do about the employees that are not part of that. How can they be turned into ‘20%’ employees?
- Work out which forms of advertising are truly effective and focus your efforts on them.
- Conversely: Find the 80% of advertising that doesn’t work and drop it.
- Figure out the tasks that YOU can do that are the 20% of tasks that are responsible for 80% of your success.
In short, by applying the 80/20 rule in your business (and your life), you will be able to do more with less. You’ll be able to put the resources you have to their most efficient use. And you will consequently work smarter, not harder to achieve your goals in a less stressful manner.
According to the 80/20 principle you SHOULD be able to work 20% of the hours (1 hour and 36 minutes each day instead of 8 hours) and still get 80% of the results. If this is the case then my question to you is WHAT are you wasting your time on for the other 6 hours and 24 minutes each day?
Here’s the kicker: What if, instead of doing an hour and a half each day of your MOST productive tasks, what if you were to extend that to 4 hours or 6 hours. Imagine the results you would achieve! Making the most of this does involve you focusing on the RESULTS of everything you do all day long. Is it extra work? It starts off that way but the massive increase to results you get is worth the initial pain until it becomes a daily habit.
Let’s look at some specific ways in which the Pareto Principle helps business owners accomplish tasks faster.
How to Use the 80/20 Principle to Boost your Business Conversions
To boost conversions, you need to find out the 20% of your website or other marketing tactics that are causing 80% of the conversions.
- If you run an ad campaign to boost conversions, check in your ad manager application to see which keywords are driving the most traffic. Find and isolate the 20% of keywords that are driving the most traffic to your website. Now start to focus on increasing the efficacy of those keywords even more and start using them in other appropriate places of your website. Perhaps (in Google Adwords for example), you can peel them off and put those keywords in their own ad group.
- Eliminate all “extras’ from your landing page that don’t encourage a reader to convert. What’s your Call To Action – what is it that you want someone to do when they reach a particular page of your website. When you know the answer to this, then concentrate on removing everything from the website that is not directly related to the CTA. Often such items include sidebars widgets, social media buttons, external links, etc.
How to Use the 80/20 Principle to Bring in More Customers At Less Cost
Your advertising funds are limited, why spend them on advertising solutions that aren’t working?
- Identify the 20% of advertising solutions (like getting a featured listing on StartLocal.com.au!) that will work to bring in 80% of your customers.
- Find out if there are ways to put more money into those 20% advertising sources.
How to Use the 80/20 Principle for Better Time Management
- Your time is limited. Find the tasks that are eating most of your time and either delete them or automate them or delegate them. This will free up time to work on the crucial 20% without leaving you overwhelmed.
- Take frequent breaks. Although seemingly counter-productive, the 20% time off will yield a higher output and ability to focus when you do get back to work. Short breaks during the work day are essential!
- Don’t waste your time (remember the 80/20 break up of your hours each day!) learning complicated ad platforms if you can have someone set your advertising up for you and be getting you the results (like on StartLocal.com.au ).
- Personally, I know that I have a peak period of the day when I am most productive – if you are the same then make SURE that in this period of the day you are doing the 20% of 20% of tasks that are most useful.
How to Use the 80/20 Principle to Find your Ideal Customers
To find the customers that bring in the most revenue:
- Create a list of characteristics exhibited by your most ideal customers. Ruthlessly market to just this segment. Ignore all others. Even though you’ll be missing out on mass marketing to everyone, this technique will make your ideal customer feel you are talking directly to them.
- Eliminate problems customers. It can be hard to let go of paying customers but eventually you’ll see that 20% of your customers are responsible for all your headaches. Eliminate them and you can now focus on the 80% of majority buying from you without complaining!
- Make your 20% Ideal Customer feel special. Give them access to special deals, front row seats, special attention, etc
- SELL MORE TO YOUR 20% CUSTOMER – this is a big one. If your top priced product is
How to Use the 80/20 Principle to Make MORE Money from your EXISTING Customers
A hidden part of the the 80/20 principle says that if you identify the 20% of your customers that are currently responsible for 80% of your income then many of those customers will pay a lot more for your services BUT only if you can provide them with something that is more valuable. The point is that you are NOT tapping out your current customers at all. If you can work out ways to provide more value to them then there will be current customers who will be happy to spend more money with you. You do have to provide something of an increased value, not just hike your prices.
How to Use the 80/20 Principle in Social Media Marketing
When marketing using social media’s 80/20 rules, here’s what to do:
- Make sure that 80% of items you share have educational, entertainment or information value. The rest of the 20% of shared items can be promotional.
- When creating content for social media, focus on producing the 20% of content type (e.g. videos, memes, podcasts, etc) that brings in the most eyeballs.
- Pay attention to your most vocal 20% fans who are your most die-hard customers and will support you through good times and bad
How to Use the 80/20 Principle in Blogging
When blogging, there are typically a few techniques that result in a post becoming the most viewed, the most commented, the most shared, etc. Here’s what you need to know:
- Spend more time crafting the perfect headline since, according to David Ogilvy, the headline is likely to be read 5 times more than the body of the post. Testing and using the most clicked headline will help a posts’ visibility.
- Don’t blog more times a week if that doesn’t increase the bottom line. Too many businesses figure that if they increase their blog posts from once a week to four times a week, it will quadruple views. But that’s not the case – your blog has an optimal frequency, test it and find out what it is.
How to SUPERCHARGE Your Use of the 80/20 Principle
Ok, so you don’t HAVE to understand this section to put the 80/20 principle to work for you but it will blast your results into the stratosphere.
If you want to SUPERCHARGE your understanding of the 80/20 principle (and I highly recommend you do!) then use the free tool from master marketer Perry Marshall at www.8020Curve.com. Read the instructions there carefully and it can reveal some amazing facts. if it still doesn’t make any sense then buy and read his book on Amazon (or on your Kindle) which goes into much more depth on how to use it (by the way, I don’t make any money by recommending this, it’s just one of the books I’ve read that is amazing and a game changer).
Here is an example of the type of information this tool can provide:
Let’s say you have a mailing list with your customers on it and you send out a post to your list to encourage them to buy a new product you are selling.
Number of emails that go out: 1,000
Number of people that buy: 50 customers
What was the value of the product they bought? $50
So, from this mailout, you made a total of $2,500.
Here’s a picture of what the 8020 curve looks like for this data:
The importance of this data is that the theoretical amount you COULD be earning from that list of 1000 people per mailout is actually $17,657 not $2,500. Now this is not completely accurate as there will be some people on the bottom of the list that won’t even buy a $5 product however it gives you an idea of the difference. It says that some of the 50 people who bought would have been more than happy to pay a lot more per product (as long as there is VALUE there for them) up to about $1,400:
It also shows that if you had a cheaper alternative as well, you might well be able to sell the next 100 people on your list (for 150 total) on a cheaper product:
So, you’ll see if you found ways to better cater to the top 150 people on your email list, instead of $2,500 from the mailout, you would have made closer to $8,000.
The 80/20 rule itself is not a solution. It’s what you do with the findings of the rule that show you the benefits and how to implement them. Applying the 80/20 to every aspect of your business will help you hone into activities that are crucial and ones that are just a waste of space. From there, you can clearly decide where you’d rather spend your time and money to boost your business.
The 80/20 Principle by Richard Koch on Amazon – The book that introduced the Pareto Principle to most people who have heard of it in the last 10 years and made it applicable.
80/20 Sales and Marketing: The Definitive Guide to Working Less and Making More by Perry Marshall on Amazon
As always, if you have questions or comments (or examples of how you’ve used the 80/20 principle in your own life) I’d love to hear them in the comments below.