Outlines the Pareto Principle 80/20 rule of business, how to appply it for sale and for time management, and the dangers of using it.
What is Pareto Principle or 80/20 rule of business?
The Pareto Principle, named after Vilfredo Frederico Pareto (1848-1923), is based on the fact that many activities (80%) are carried out by a small number of players (20%) in numerous markets around the world. Also known as the 80:20 rule, the Pareto Principle is often mentioned in the areas of project management and time management.
Pareto recognized that in Italy 20 percent of families had 80 percent of the wealth. It was therefore clear to him that banks that wanted to run their business efficiently had to focus on precisely this 20 percent. For years he then applied his 80/20 rule to a wide variety of areas. His Pareto principle was later supported and confirmed by many scientists. The success stories triggered by the Pareto analysis came from numerous industries and proved the flexibility of the strategy.
The Pareto distribution derived from this states that a small number of a quantity can make a large contribution to the total value of the quantity, while the largest part makes up only a very small proportion of the total value.
Definition of the Pareto principle or 80/20 rule of business?
To define the Pareto principle, you can easily describe it as the 80/20 rule of business, also known as the marketing 80/20 rule. This means that in many cases an 80 percent result can be achieved with just 20 percent use. But if you don’t want to be satisfied with 80 percent, then you just have to increase your stake slightly. From this 80/20 rule, an equation can be derived that you can apply to almost any area of life and that is not limited to your business. In short, this means that, according to the Pareto analysis, there are only a few things that are important for your success, and it is precisely these things that you have to keep an eye on.
How can you apply the Pareto principle?
The Pareto principle is now known worldwide and is or has been used by many successful entrepreneurs. If you want to increase your profit and reduce the associated costs and effort, then the numbers 80 and 20 should serve as a guide. There are studies by scientists that show that companies could increase their profits many times over. All that would have to do is sell more of the best products or buy more from the best customers or more good employees work in the company. For yourself, this means that you now have to analyze what you make the most profit with, but also find what only costs you time and money. To do this, you have to do the following:
Step 1: Find the right customer or customers for you
When it comes to customers, let’s also apply the Pareto principle. This means that you make around 80 percent of your sales with 20 percent of your customers. This is precisely why a loyal customer is so important for a company. You should now find out which customers you have with whom you generate a lot of sales with little effort. Then you have to take a close look at these customers and try to meet all of these customers’ wishes if possible. You can tailor certain products or services to these customers. To put it brutally, you can neglect the customers who buy little from you in a certain way.
Rather, your goal must be to turn your good customers into real regular customers. Of course, you not only have to offer good products or services, but also very good service. For you, that doesn’t mean that you can lean back when you’ve found around 20 percent. You know that the market is always changing and that is why you have to keep an eye on the behavior of your customers despite the application of the Pareto principle.
Step 2: Offer your customers the right product
You can also apply the Pareto principle to your products. If you have several products or services on offer, you will also find that there are around 20 percent of them with which you generate around 80 percent of your sales. So find those products that get the most into the cash register and focus your sales and marketing strategy on them. To find out, you should consider the following points:
- How much time do you have to spend selling the product?
- Do you have to do a lot of advertising to sell your product?
- How difficult and complex is the manufacture of the product?
With the Pareto analysis you can easily determine which product you can make the most profit with. Should it be necessary, then you simply have to adjust your offer accordingly.
Use the Pareto principle for your time management
The 80/20 rule is also ideal for your time management . Important things in everyday work that also make you more successful should be given more attention and weighted. Here, too, the various measures can be concentrated and focused on the really important 20 percent. The following measures are possible according to the Pareto principle (in brief in the list and more detail below that):
- 1. Make a list for unimportant things: Make a list of the tasks that are actually not important and which you can put in the back.
- 2. Use the “Rule of 9”: This is a rule that can be applied to many things in life. Let’s stay with your business. You have ten ideas , but only one of them will work and be successful. You can find out exactly this idea with the Pareto principle.
- 3. Limit your time: You have to set a deadline for all of your tasks. After the deadline has expired, you can see whether it is important to you or if you can rather neglect it.
- 4. Don’t strive for perfection: You should strive less for perfection, just try more. Corrections can be made later, but first you need to find out if it works or not.
Identify really relevant tasks
The crucial point to use the Pareto principle for your time management: Find out which tasks really bring you closer to the goal . Keep in mind what exactly you want to achieve and look at the individual subtasks carefully. Often you can see at first glance what is really important and contributes to the result and which other tasks take a lot of time but bring little additional benefit.
Concentrate your work
Often the mistake is made of fighting on all fronts at the same time. Motto: A lot helps a lot. The Pareto Principle shows that this very approach is wrong. Much better: Concentrate your efforts instead of wanting to do everything at once. This is how you really get ahead instead of just a little bit of everything. You can achieve noticeably more in a much shorter time.
A simple example to illustrate this: Your boss tells you to prepare a customer presentation and provide information about the progress of the project. However, you only have three hours to do this because the customer has called a spontaneous meeting. Now you can look for a design, talk to all the colleagues involved in order to be brought up to date, create graphics and diagrams, incorporate transitions between the slides … In the short time you can probably only manage a fraction and end up with one barely presentable presentation.
Or you use the Pareto principle: You concentrate your work on the most important aspects . You only talk to the project manager, bring the essential information clearly on slides. After a short time you will have a result that you can present – the rest of the time can then be spent on details and refinements.
Accept limited resources
A wrong attitude often stands in the way of the Pareto principle . Sometimes you have to accept that you have limited resources – in many cases, a limited amount of time. Instead of trying to make the impossible possible and still achieve the goal 150 percent, you should ask yourself: What can I achieve in the best possible way within the limited resources?
Many find this difficult because their own perfectionism and too high expectations of themselves get in the way. But with the right attitude and the Pareto principle, you will achieve very good results.
Review the Pareto principle regularly
You should check yourself at regular intervals, for example once at the end of the week. Check out what you’ve been up to this week. You should answer the following questions yourself according to the Pareto principle:
- Has this week brought me anything further on the way to success ?
- Where did I lose time this week and thus also waste time?
- What did I do this week that didn’t produce any result and I couldn’t make any progress.
This is also how you can use the Pareto principle to find out what you shouldn’t continue and on which things you should perhaps invest more time.
The danger of the 80/20 rule of business
However, the 80-20 formula (or 80/20 rule ) is often misunderstood or misinterpreted . Instead of helping productivity and self-management, this can lead to a loss of benefit or even damage to the incorrectly applied rule.
So that this does not happen to you, we warn at this point of the dangers of incorrectly interpreting the 80/20 rule:
- A classic mistake is to add 100 percent of the two numbers . In this case, those transferring the 20 or 80 percent into a pie chart . Not correct! The Pareto principle only says that 20 percent of the effort can be responsible for 80 percent of the income. But commitment and return are not the same.
- Another misinterpretation is to invert the causality of the rule . Basically, time management with the 80/20 rule is about focusing on the efficient 20 percent to improve your productivity, for example. But that doesn’t mean that the other 80 percent can generally be dispensed with. In every job there are tasks that have to be completed but are not particularly productive: gathering information, evaluating data or answering e-mails, for example. You cannot simply do without it completely, but with the Pareto principle you learn to focus on the most important ones when time is short and results have to be achieved.
Michael Gartner, Harvard lecturer and Pulitzer Prize winner, put it the other way around and thus delivered another amusing interpretation of the Pareto principle :
He thinks that it is often only 20 percent of job waste that robs us of 80 percent of the fun at work. Be it unproductive meetings , chaotic bosses or Primadonna colleagues. But it’s only 20 percent. In the end, what counts is the other 80 percent of real passion …
The Pareto Principle can be a sensible just a food for thought for you to look for things that reduce your profit. This in turn can be used to derive possibilities to increase your profit . However, you shouldn’t try to change everything according to the Pareto principle. It is better to look at the individual processes and then decide whether the Pareto analysis can improve them.