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The Origins of the 80-20 Rule and Why it Matters

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The Origins of the 80-20 Rule and Why it Matters

In this article, Arthur Wojcicki explains how the 80-20 rule works and how it can be applied to business to yield stronger results and mitigate losses.

Perhaps not everyone is familiar with the name Vilfredo Pareto, but many have probably come across his namesake, the Pareto Principle, also known as ‘the 80-20 rule.’

Popular as it is, I’ve still heard it’s meaning get massacred when discussed in various circles. Although different 80/20 slogans exist that may be confused with Pareto’s (e.g. “Success is 20% Inspiration and 80% Perspiration”), the original Pareto Principle essentially outlines that 80% of outputs are a result of 20% of the inputs.

For a business, this could mean that 20% of your customers provide 80% of your revenues. For an employee, that could mean that 80% of productivity is a result of only 20% of total work done. Think about that for a moment. Is there anything that you can reduce, eliminate, or automate, to focus exclusively on that specific 20% to become super efficient? What would you do with all that freed time – perhaps go home early for once?

The 80-20 rule is an incredible assertion, not just because it’s been empirically proven, but that it actually holds true across many subjects.

When I first did an 80/20 assessment of one client’s revenues over a calendar year, I was astounded at the fact that I got exactly (rounded to the nearest whole number, of course) an 80/20 split comparing their clients to gross earnings. There were a total of 224 unique, invoiced clients that year. Imagine, 45 clients provided 80% of the earnings (millions of dollars in this case). That means 179 clients were responsible for the remaining 20%. This beckons the question: is it worth it?

When presented with this proposition, the small business owner is horridly reluctant to let go of the bulk of their customers. It’s downright scary – I know. And I’m not saying to disregard people, especially if they’ve helped you to build your brand, but what I am saying is to investigate further into the true costs of maintaining your business by saying ‘yes’ to everyone.

 

Key points include:

  • The foundation of the 80-20 principle
  • Cost of servicing bottom 80
  • Focussing on the core 20%

 

Access the full article, Proving Pareto Right, on LinkedIn.