I have followed the Pareto Principle throughout my career, and it’s been a game changer. If you’re not familiar with this principle, it is a rule that states:
- 80% of your profits come from 20% of your clients or services
The same idea applies whether you’re talking about leads, marketing, products – virtually anything relating to your business.
The idea is that 20% of something leads to 80% of success.
At the firms I’ve worked at, we found that the top 20% of our clients drove 80% of our revenue, so we identified and nurtured these clients more. But for the Pareto Principle to work for you, you’ll need to actively use it to improve and change your business.
How can you apply this principle to all areas of your business?
How to Apply the Pareto Principle to Different Aspects of Your Business
If 80% of outcomes are from 20% of causes, as Asana suggests, then you can apply this concept to multiple areas of your business:
Client Base
Your client base is the lifeblood of your business, so it’s a good place to start applying this principle. You can begin with:
- Identifying your top 20% of clients – those that add up to roughly 80% of your revenue.
- Focusing on these top clients to ensure that you attract more similar clients who are easy to work with and profitable.
- Identifying your bottom 20% of clients and considering whether it’s worth working with them any longer or if they need additional nurturing or support to become profitable.
If you stop with the Pareto Principle right here, you’ll improve profitability and begin working with more of the clients that are hassle-free and profitable. But you can also apply this principle to other areas of your business.
Marketing
How do you land your ideal clients? Marketing. Again, 80% of clients will come from 20% of your marketing efforts. You’ll need to identify which marketing strategies are working best for you and allocate more resources to them.
For example, if only 10% of your marketing budget is dedicated to Google Ads but it’s generating 70% of your leads, it’s time to reallocate your marketing to focus more on Google Ads.
You don’t want to put all your eggs in one basket, but you do want to focus more on what’s working right now and less on other marketing efforts.
Equipment and Production
Equipment usage also needs to be assessed. You‘ll often find that 80% of production and profits come from just 20% of your equipment. Work with your team to determine if there are ways to:
- Optimize equipment usage to be even more profitable
- Focus on more profitable products
- Eliminate unprofitable equipment usage
Once you’re done with your equipment and production, you can move on to employee performance.
Employee Performance
Service-based businesses typically find that a certain percentage of employees contribute to a large portion of their profits. You can use this information to:
- Reward your top performers
- Analyze your under-performers
- Train up or replace under-performing employees
You should spend time analyzing employee performance every month or quarter to help keep every employee as productive as possible. Recognizing your top performers may be the incentive they need to continue exceeding expectations.
Outside of internal changes and optimization, you can apply this same principle to your decision-making.
Applying the Pareto Principle to Strategic Decision-Making
The Pareto Principle can also be applied to strategic decision-making. Whether you’re making decisions related to professional relationships, market changes or even your products or services, the 80/20 rule can come into play.
Here’s how.
Improving Client and Employee Relationships
Client and employee relationships are fundamental to the success of your business. When making strategic decisions, such as determining whether to replace or retrain underperforming employees, you can use the Pareto analysis to support the decision-making process.
To reinforce positive behaviors:
- Make it a point to recognize your top-performing employees regularly.
- Don’t overburden your best employees with problematic or challenging clients. Rather, pair them with the best clients to maximize satisfaction and profitability.
A Real-World Example from General Electric (GE)
General Electric (GE) is one real-world example of putting the Pareto Principle into practice when it comes to employee relationships. GE was well-known for replacing the bottom 10% of its workforce every year.
While this practice was perceived as ruthless, it ensured that the company was continually improving and retaining only its most committed and capable employees.
Adapting to Changing Markets
When markets shift, you must be prepared to make swift decisions. For example, if the market softens, the hiring landscape changes, and it becomes easier to find replacements. In a scenario like this, you can apply the Pareto Principle to continually evaluate the bottom 20% of your workforce and determine whether you need to rehire or retrain.
You can apply this same principle to your clients and products. Continually assess and reevaluate to ensure you’re focused on the most profitable areas.
Analyzing Products and Services
The Pareto Principle can also apply to decisions relating to your products and services. Remember – 80% of your profits are often generated by 20% of your products or clients. Make sure that you’re evaluating your offerings regularly and with this rule in mind.
Focus on the top 20% of products, services, or clients that generate the most profit and consider eliminating or improving the bottom 20% that may not be contributing at all.
For example, let’s say that you run a roofing business, and you find that more labor-intensive jobs are tying up resources without providing an adequate return. In this case, you can adjust your pricing strategy to avoid these types of jobs and free up time to focus on more profitable work.
Final Thoughts
The Pareto Principle can be a helpful tool when making important business decisions. Whether you’re evaluating your workforce or investing in growth, you can apply this principle to your decision-making process.
Use the guide above to start implementing this tool into your business management practices and help steer your team to success.
To learn more about growing your business using the Pareto Principle or to schedule an appointment, click here.