The 80/20 rule and how it can change your business
Updated on 23 Nov, 2020 | 7 min read
How to apply the 80-20 rule so you can make the most out of a business' limited resources. Use this guide to apply this wisdom during decision making.
The 80–20 rule, or the Pareto principle, can be essentially summarized as a global observation that roughly 80% of all output comes from roughly 20% of the input. It’s the discovery that many things in life are distributed unequally, and that you can often find that a small proportion of your resources and actions has a much bigger impact than the rest of them combined.
Top businesses in the world use powerful, sophisticated analytics capabilities to identify how the 80–20 rule could be impacting every aspect of their business. They then use these discoveries to focus on the activities or resources that give the best results, and leverage them to propel their business forward.
But for many small business owners, these strategies may seem out of reach. Business optimization can take considerable resources, time and mistakes before these powerful impacts can be realized. This is a large risk for businesses where resources are incredibly limited.
However, it is exactly because resources are limited that you should be as effective as you can possibly be.
And it’s not about what technology you utilize, but the mindset you use when making decisions about your business. You need to observe your business regularly to discover what products or tasks are leading to the biggest results for the same amount of time or effort. Here are some reasons why you should focus on your best selling products:
- They solve a critical pain point well for your target audience, who are then more likely to promote your business to others.
- They come from your most effective marketing channels, so boosting them will work better than other channels.
- They help you profile your happy customers, and this helps you find ways to boost sales of other related products.
Narrow down which reasons are right for you by listening to your customers. Keep a constant eye on your best sellers, and why people buy them. Every bit of research goes a long way.
Done once, you can then try applying the 80–20 rule to other parts of your business. For example:
- Trim your worst performing products and cut down your inventory cost
- Identify the tasks that bring the highest impact to revenue. Then automate or outsource the less time/cost effective tasks.
- Test out new innovations, by focusing on the quickest, simplest ways to test if an idea is viable.
The 80–20 rule is powerful, but it isn’t always obvious or easy to apply.
If you are just starting out, or are struggling to make this work, here are some tips to remember:
Take time to measure things
The 80–20 rule only works if you’re collecting data on how things work in your business. And this does require effort and maintenance. But the effort you spend to get this knowledge has a multiplier effect when you utilize it to prioritize actions that make the best impact on your business.
It’s easy to get distracted
Every day there will come problems, and tasks that seem to need your immediate attention. This is where you can apply the 80–20 rule as a mindset. Focus your efforts only on the things that bring in meaningful results.
It’s okay if things are not perfect
Getting the data together, and analyzing your business regularly may be tough when you first start out, but it’ll get better as you practice. Pick your battles, focus on doing the best you can, then focus on being consistent.
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