The 80/20 rule, or the Pareto Principle, says that you gain 80% of results from 20% of all efforts you put into something. As business managers, the first thing we typically think of when we hear this is revenue. If we’re only gaining 80% of our revenue from 20% of our sales, how can we maximize this ratio to increase our revenue?
The Pareto Principle helps you identify what techniques yield the most rewards in life, particularly in business. Whether you use it to discover the right target audience, the best marketing strategy, or the most effective sales funnel, the 80/20 rule helps you minimize wasted effort while increasing productivity for maximum results.
Introduction to the 80/20 Rule (the Pareto Principle)
The Pareto Principle was developed in 1906 when an Italian economist, Vilfredo Pareto, noticed that only 20% of the pea pods in his garden were responsible for yielding 80% of the peas. This realization led Pareto to expand the theory further to macroeconomics in Italy. Eventually, Pareto discovered that 20% of Italy’s population owned 80% of the nation’s wealth.
As the theory gained popularity, more people proved it across a variety of applications. The 80/20 rule states that 20% of the effort you put into something yields 80% of the results. Essentially, if you can locate this 20% and focus on this sector, you can refine your efficiency.
The 80/20 rule is not a guaranteed law, like gravity. Instead, it’s a logical concept that can help people maximize their efficiency. Pareto analysis claims that you can achieve 80% of a project’s outcomes by doing just 20% of the work, assuming you nail the technique.
You can apply the 80/20 rule to many aspects of life, from reducing the amount of time it takes to study for a test to improving quality control at your business.
Identifying the 20%: Key Revenue Drivers
One of the primary ways businesses use the 80/20 rule to their advantage is by identifying key revenue drivers.
Say your business has 100 clients. Following the 80/20 theory, only 20 of these clients are contributing to 80% of your revenue. If you can identify who these 20 clients are, you can strengthen your relationship with them to encourage more sales.
Locating your 20% doesn’t just ensure that you keep those existing clients; it also prevents you from losing potential leads. For example, you may discover that all of the clients in your 20% share a distinct characteristic that sets them apart from your other target audiences. Upon making this discovery, you can shift your marketing strategies in the future to begin focusing on people who could potentially become key revenue drivers.
Maximizing Output With Minimal Input
The basis of the 80/20 rule revolves around selecting what you do carefully. If only 20% of your activities are worth your effort, you don’t need to spend time doing everything. Essentially, you want to maximize your efforts by selecting the correct 20%.
- Products: Say you own a restaurant that serves a wide variety of dishes. You’ve noticed lately that your customers only tend to order a few popular dishes off the menu. You can cut costs and labor time by trimming your menu to only offer these popular dishes.
- Employees: If you take a few laps around your office during the beginning of the day, lunchtime, and the end of the day, you may notice who arrived early, who took a long lunch, and who stayed late. Typically, just a handful of hard workers do the heavy lifting for the team. You could use this information to refine your crew.
- Work meetings: Say you’re going to host a 100-minute meeting, and you outline a few key topics in advance. Odds are, the primary items at hand can be trimmed down to around 20 minutes, while the rest could be sent out in email form.
Customer Relationships and the 80/20 Rule
If you want to use the 80/20 rule for increasing key revenue drivers, you’ll need to identify your top clients and nourish those relationships. You can use tools like Google Analytics and tracking contact forms to locate your business’s top customers and their marketing sources.
We recommend conducting further analysis to learn more about this group of people. Consider common demographics, goals, pain points, and more. For example, your top revenue drivers may be 40-year-old business professionals seeking a software solution for streamlining their company’s accounting.
Once you’ve located your 20%, you have two primary goals: enhance your relationships with customers currently in that group, and find more people that will fit into that target audience. Here are a few ideas for fostering customer relationships:
- Send check-up emails to see if the customer needs anything
- Add them to the company newsletter for updates and helpful content
- Send out surveys for improvement feedback
At the same time, you can work on finding new key revenue drivers that fall into your defined target audience so you don’t waste resources on non-yielding efforts.
Productivity and Efficiency Enhancement
With the 80/20 rule, you want to put in as little effort as possible to achieve even better results. Now that you know who your largest revenue drivers are, you can focus your efforts on this target audience to become more efficient. For example, you can shift your marketing copy and advertising efforts to appeal to their interests rather than a wide group.
Your productivity and efficiency enhancements don’t need to end here, though. You can also apply the rule to all of your marketing efforts, sales strategies, employment efforts, and more.
Marketing Strategies and the 80/20 Rule
The primary marketing strategy involved in the 80/20 rule is using the concept to locate your most lucrative customers. Next, you can strategize ways to entice your niche audience. For example, you may create paid ads that speak to their pain areas.
Beyond this, though, you can use the 80/20 rule to eliminate your current non-yielding marketing tactics. Your marketing budget can only stretch so far, so you don’t want to waste funds on efforts that don’t bring clients in. Try looking at all of your current marketing efforts, then evaluate which streams are actually bringing clients in.
For example, you may notice that your website and social media channels attract the majority of your clients, while your email campaigns have only successfully converted two leads. If you’re investing time and money in email marketing only to see two conversions, you may want to re-invest those efforts into your website, which is actually showing successful results.
Sales Optimization Using the 80/20 Rule
You can also maximize efficiency and profitability by applying the 80/20 rule to your sales strategy. Most companies sell numerous products and services, though one often stands out from the rest. You may have one or a few claims-to-fame that keep customers coming back, while the rest are draining your resources for no good reason.
We recommend reviewing your sales figures to locate your poorest-performing products or services. You may not necessarily need to stop selling certain items entirely, but you could discontinue products in certain colors or varieties that aren’t popular. Doing so cuts down on your overhead, reduces marketing costs, and helps you achieve similar sales figures, as your customers will still be able to purchase their favorite items.
If you’re unsure about your most profitable products or services or are worried about disappointing a few clients, you can also send out a survey asking for opinions first. Your survey could have customers vote on their favorite products or which item to discontinue.
Challenges and Limitations of the 80/20 Rule
The primary challenges and limitations of the 80/20 rule arise from people misinterpreting the concept. Despite its name, the 80/20 rule is not actually a rule; it’s a theory.
Just because you put 20% of your effort in does not mean you will yield 80% of the results. The numbers do not refer to percentages adding up to 100%, but rather individual causes and consequences. You should still put in 100% of your effort, just for more dedicated tasks (20%).
Many people also falsely assume that the 20% you’re focusing on is more important than the 80% which does not yield as many results. In many cases, though, the 80% is still important, even when you decide not to prioritize it. When you choose not to prioritize the 80% group at all, you can accidentally limit yourself, especially if you dive in too deep and lose sight of the project.
For example, even if you decide to only focus on your key revenue drivers, you cannot forget about your daily tasks like bookkeeping, team meetings, and emailing clients. Such tasks may be part of the 80% and may not feel as vital to sales, but they are still crucial in keeping the business flowing.
I have personally been implementing the 80/20 rule into my company’s marketing strategy as of late. We have identified the type of our most common clients and have, as such, been focusing as much of our marketing efforts as possible on that group. We’ll soon see the degree of success we reach with these efforts, but if our past results are any indication, the 80/20 rule will certainly bring us great success. I hope this article will bring you the same, if not greater, success.