Table of Contents
- What Is the 80/20 Principle?
- Who Developed the 80/20 Rule?
- Examples of the 80/20 Rule
- How to Apply the 80/20 Rule
- What to Know Before Implementing the 80/20 Rule
Imagine how different your life would be if you could eliminate the frustration and stress that comes with pouring yourself into business strategies that aren’t producing the results you want. The great news is that there’s a way to amplify productivity and the outcome of hard work. It’s called the 80/20 rule, also known as the Pareto Principle. This strategic planning tool helps leaders pinpoint exactly where to focus their time, resources, and energy. Doing so results in less burnout, better business relationships, and an increase in profits and revenue.
Find out more below about the 80/20 principle, examples of it in action, and how to apply it to your organization for more efficient and effective outcomes.
What Is the 80/20 Principle?
The 80/20 rule states that 80 percent of outcomes are determined by 20 percent of input. For example, if your goal is to acquire 100 new leads, 80 leads would come from only 20 percent of what you did to get them. This is why it’s important to know how and where your effort makes the most impact.
When you identify what you’re doing to make a difference, you and your team can prioritize the 20 percent of work that generates the best results. Doing so also cuts out your least effective strategies. This saves people from the “trial and error” process which can expend too much energy on efforts that aren’t as valuable to your cause.
Who Developed the 80/20 Rule?
Italian economist Vilfredo Pareto, a political scientist, conceptualized the Pareto Principle at the turn of the twentieth century. First, Pareto noticed 20 percent of his peas thrived and produced 80 percent of his overall crop. Next, he applied this concept to wealth distribution. He found that 80% of the land in Italy was owned by 20% of the Italian people. The principle applies beyond peas and land in Italy, the notion applies to nearly every circ*mstance regarding inputs and outputs. For instance, 20 percent of the hardest working team members receive 80 percent of all raises or 20 percent of all customers account for 80 percent of sales. While the figures don’t have to be exactly 80/20, the idea is that the percentages are extremely disproportionate.
In 1941, Dr. Joseph Juran applied Pareto’s Principle to business and operations management. Like Pareto, he found “For many phenomena, 80% of consequences stem from 20% of the causes.” Because of this, he adapted the idea into a universal law that acknowledged focused effort on the top 20 percent of an input results in an 80 percent better outcome. He used this theory to refine production processes, manage quality control, and greatly improve businesses’ products. Over time, the idea circulated throughout small businesses, gained traction, and is still popular among entrepreneurs today.
Examples of the 80/20 Rule
Business owners might wonder what the 80/20 rule looks like in action. There’s a variety of areas in your business to recognize the Pareto Principle at work. A great starting place is your metrics. Disproportionate numbers tell a story. They let leaders understand what is going wrong and what is going right. Letting these trends emerge is important because it shows entrepreneurs and executives where the company’s top priorities exist.
For instance, say your business has five viral blog posts which led to huge sales. What was the content of those posts? Which keywords did they contain? Did the same person write all of the articles? Get inquisitive and try to find similarities in your successes.
Here are a few other examples of how to use the 80/20 rule for success:
- Creating 80 percent of the company’s next leaders by investing in the top 20 percent of team members.
- Gaining 80 percent more business knowledge by dedicating 20 percent of your time to receiving mentorship.
- Becoming 80 percent more profitable by doubling down on the 20 percent of strategies that bring in the most revenue.
How to Apply the 80/20 Rule
So how can a business owner implement Pareto’s Principle to maximize productivity, effectiveness, and impact? Find the top ways to pinpoint your priorities and use the 80/20 rule to your advantage below.
1. Focus on the Top 20 Percent of Your Customers
An excellent strategy for growing your company is to surprise, delight, and excite your biggest supporters. Doing so keeps the momentum in your business rolling. Consider what would happen if an organization put 80 percent more effort into pleasing the top 20 percent of its customers. How would this change the number of repeat sales, referrals, and overall profits?
Your company’s brand advocates are your most effective marketers. Your “top 20” show their support by sharing positive reviews, posting about your company’s products and services on social media, and starting conversations about your business with their friends and family. Their love of your company makes them the most valuable (and rarest) type of customer: a loyal buyer who also brings in new sales. Treating them as invaluable is a great way to create transformative growth in your organization.
To invest more heavily into your top 20 percent of customers, consider:
- Throwing special events for them.
- Sending them surprise gifts like a book or gift card.
- Including a personalized thank you note with their order.
- Calling customers directly to thank them for their support.
- Giving personal shoutouts to your top buyers on your social media account.
- Providing discounts on their next purchase.
- Automatically entering them into giveaways and contests.
- Letting them try and review new products for free.
- Developing an easy-to-use customer loyalty program full of fun, valuable rewards.
These are all a part of a powerful marketing technique used by companies like Amazon, Zappos, and Disney. Instead of focusing time, energy, and money on acquiring new customers with a traditional marketing funnel, they use a marketing flywheel. A huge factor in transforming a funnel into a flywheel is amplifying the customer experience—especially for the top 20 percent of buyers. As HubSpot’s co-founder Dharmesh Shah puts it, “The more advocates you have, the fewer ads you have to buy.”
Learn more about how to delight your customers by following Amazon leadership principles.
2. Solve the Company’s Biggest Problems
Another way of using the 80/20 rule is to identify and eliminate any roadblocks preventing a company from reaching its full potential. When used to develop greater business outcomes, Pareto’s Principle helps leaders recognize ineffective efforts and spend a larger portion of time addressing these problems.
To find and resolve company problems:
1. Start by looking at the organization’s metrics. Where are KPIs unmet? What are the top issues cited by customer service reps? Which marketing strategies are not good? Where does website traffic dwindle? What is the root issue? Spend some time getting curious about the reason behindwhy certain numbers are up or down.
2. Create a list of the business’s biggest problems, including the least impactful strategies.
3. Use a whiteboard or a large sheet of paper to rank how detrimental these issues are on a scale of 1 to 5 (with 5 being the worst).
4. Put all of the “5’s” onto a new, separate list with two categories: “What to Eliminate” and “What to Fix.”
5. Limit each group to three issues in order to whittle it down to “20 percent.”
6. Meet with your team and discuss plans for shifting away from strategies on the “What to Eliminate” list.
7. Work through a problem-solving session with your leadership team for the issues on the “What to Fix” list.
8. Plan out the implementation of solutions.
In addition to these steps, remember that too much change at once can deeply affect a team. Switching things up to focus heavily on the company’s top 20 percent of problems without an organizational plan can cause team members to stress. Make sure to practice strong change management by explaining the why behind any changes. Also, explain the how and when of these adjustments. As a leader and a guide, it’s important to give more answers than questions.
3. Do What Reaps the Greatest Reward
When executing the 80/20 rule, stay focused on what you do as an entrepreneur or leader that truly makes a difference. As leadership expert John C. Maxwell says, “If you want to do a few small things right, do them yourself. If you want to do great things and make a big impact, learn to delegate.” Without this leadership quality, business owners will find themselves mired in work throughout the day that doesn’t help the company scale to the next level. Time is one of an entrepreneur’s greatest assets. Remember, how you use it can either make or break your organization.
To get started delegating using the 80/20 rule:
1. Make a list of everything you do on a daily basis and how much time each one of these responsibilities takes.
2. Next, circle the top tasks you must do. For instance, this could be time for strategic planning, meeting with your leadership team, and mentoring employees. Tasks like these are within your 20 percent of top priorities. This would not include jobs like payroll, scheduling employees for work, answering the business’s phone, or acting as a project manager.
3. Assign tasks outside your “20 percent” to a capable person.
4. Make sure this person is willing to be accountable for any new duties.
5. Set up expectations for a job well done.
6. Use your newly freed time for working in the areas that produce the greatest outcomes.
To stay true to the 20 percent of tasks you do that matter as an entrepreneur, you’ve got to learn how to say “no.” As Steve Jobs put it at Apple’s 1997 Worldwide Developers Conference, “When you think about focusing, you think, ‘Well, focusing is saying ‘yes.’ No. Focusing is about saying ‘no.’” This means before saying “yes” to any new time commitment ask yourself, “Is this within the 20 percent of work I do that impacts the business more than anything else I do?” If the answer is “no,” don’t take it on. Instead, delegate the responsibility to a person you trust or decline the opportunity.
Learn more about delegation and other best practices for time management.
What to Know Before Implementing the 80/20 Rule
Before applying the 80/20 rule to your business and life, evaluate your current situation. For example, Tim Ferriss, best-selling author and a huge proponent of the 80/20 rule, discusses how to do this in The 4-Hour Workweek. He says those looking to create better outcomes need to ask themselves two important questions:
“1. Which 20 percent of sources are causing 80 percent of my problems and unhappiness?”
“2. Which 20 percent of sources are resulting in 80 percent of my desired outcomes and happiness?”
Your answers create a book for being a happier business owner. The 80/20 principle can equip leaders to drive growth and create results that help their companies fulfill their mission. Life as an entrepreneur is much more exciting and enjoyable when purpose and effectiveness align and produce rewarding outcomes. After all, making a positive impact on the world around you is what makes the journey of entrepreneurship worth all of the hard work and dedication.
