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Boost Your Productivity with the Pareto Principle (80 20 Rule)

 

pareto principle 80 20 ruleAre you guys ready? THINQ is about to get all mathematical on you!

The Pareto Principle. 80/20 Rule. Factor Sparsity. "The vital few and trivial many." These are all terms referring, more or less, the same mathematical phenomenon.

It all began--or rather, was recognized--in the early 20th century when an Italian economist named Vilfredo Pareto observed that roughly 80% of the wealth was controlled by about 20% of the population. Lo and behold, others began to recognize that the 80/20 rule applies across a myriad of disciplines and situations. Roughly speaking (and assume that all the numbers in this post are roughly speaking), 20% of the causes generate 80% of the results. Here are just a few of the observed instances in the business world:

  • 80% of the complaints come from 20% of the customers.
  • 20% of the work on a project consumes 80% of the resources.
  • 80% of the business comes from 20% of the customers.


Why is this so? What makes it so? What mathematical computations do I have to prove this phenomenon? The answers are "I don't know," "I don't know," and, "Ya gotta be kidding me, right?"

If you would like to enroll in some higher mathematics courses to understand the nuts and bolts of it all, be my guest. I don't pretend to comprehend all the physics behind what makes 70 tons of metal jet across the sky with the birdies, either, but I know it happens. You don't have to understand the reason something happens to accept the fact that it does happen.

So now that we've accepted that the Pareto Principle occurs, how does it affect your small business? Well, I'm glad you asked! 

1. Focus, Focus, Focus!

Focus your energy, your time, and your resources on the customers who provide you with most business. Does this mean to ignore the little guy? Not at all. It just means to be realistic about where the meat and potatoes of your business come from. If 20% of your accounts are responsible for 80% of your profits, you'd better make darn sure you're taking good care of that 20%. You may have to flip-flop your thinking a bit. On the surface, it may not make sense to have the bulk of your staff tied down to a small percentage of your accounts. But if that small percentage is responsible for keeping your business afloat, it makes a LOT of sense.

2. Know When to Cut Them Loose

Don't let "The customer is always right" be a death knell for your productivity. If you have a customer who is consistently a problem -- if after a reasonable (or sometimes unreasonable) amount of effort, it's clear they cannot be satisfied -- you have to consider cutting them loose. If one impossible-to-please account is sucking up a disproportionate amount of your time (read: money), it's not fair to your business, your employees, or your other customers.

3. Invest in the Right People

If 20% of your employees are responsible for 80% of the results, then it's important to make sure those employees are given the resources to succeed. Invest in their training and their skill set, and make it clear with salary, benefits, and incentives that you value their contributions. If they succeed, you succeed.

Can you think of other ways you can apply the Pareto Principle/80-20 rule to your small business? Leave them in the comments!

Image credit: Olle Jonsson

 



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