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The Pareto Principle – It’s the 80/20 Rule

Description:

Even though you may not know the Pareto Principle name – the principle applies in every business in so many ways.

Content:

I. Application

The Pareto Principle fits in organizations in so many ways e.g. 80% of turnover can be attributed to 20% of the product or service line; 80% of profit comes from 20% of customers; 80% of our interruptions come from 20% of colleagues, and so it goes on. Someone has even said that 80% of the work is done by 20% of the people! The making of a Strategic Business Plan can quickly focus on the things that matter. Basically we are talking about the vital few and trivial many. It has been said that one of the major reasons for organizations failing was their inability to stick with the few but vital important issues. The basic rule that applies to business activity is that 80% of the results come from 20% of one’s activities.

II. Individuals Too

Just as organizations get bound up with the unimportant, but many items that cause their demise, so it is with individuals. We can all be busy running around in circles doing a lot but actually achieving little. This merry-go-round syndrome ensures that we head down a road to disaster. Recognize what is important, and moves you towards your company’s goals, and concentrate on these few important items. Look at meetings for example – does 80% of the important discussion take place in 20% of the time?

III. Marketing and Pareto

Look around and you will see that many organizations are taking this principle seriously. They have found that by putting a lot of energy into acquiring new customers, they have turned their backs on their existing top customers. It isn’t until they lose one or two of the top ones they realize that something has to be done differently. They found that the top 20% customers accounted for 80% of the profit. Does 80% of business from advertising come from 20% of the budget?

IV. Retaining Customers.

If this principle applies to your customers then your approach must change. It is not all as simple as it sounds. Whilst it is important to build strong alliances and put a lot of energy into adding value and services to the top customers, new customers are important as well. Over a period of time the status of customers changes, and although companies categorize their customers differently, it is known that small can become big, and big can go out of existence! Do 80% of customer complaints come from 20% of the customers? Do 80% of the customers come from 20% of the territory you serve?

V. Sales and Sales Productivity

Are 80% of the sales done in 20% of the time the business is open? Can you decrease the number of employees on hand during the slow times, or can you do those tasks that get put off when things are busy by using the “surplus” staff in areas they may not usually be employed? Is it possible to boost sales for slow and non-selling products or services during these slow times? Are 80% of the sales coming from 20% of the sales staff? In this case it may not be the fault of the sales person. How are the territories set up, or are the clients distributed differently, are there difficulties in delivery?

VI. Inventory or Supplies

Is 80% of the business being done on 20% of the selection of products or services? If this is so then why carry or offer things that don’t sell often or sell at all? For a new business it is necessary to have depth in each offered item until a record of usage can be established. Rate of sale is important because good selling items must have a higher stock level. There may be seasonal or periodical increases in sales or usage which must be considered.

SUMMARY
Whether the Pareto principle applies or not, it is up to organizations and companies to make a study of those areas that cause problems, and then produce information or statistics and take decisive action to resolve difficulties. This process is carried out as part of producing a Strategic Business Plan.

Author: Bob Pearce

About Author:

Following a career as a Naval Engineer Officer and many successful years in Senior Management positions, and in Small Business mentoring, Bob has chosen to use the benefit of that experience to help business Owners and Managers create successful businesses. His website http://www.strategic-business-plan-4u.com contains a lot of free advisory information, and his eBook on Strategic Planning is a simple, easy to follow approach to set the pathway for a successful business.

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