80 - 20 Rule(The Pareto Principle)

You may have heard of it as the 80-20 rule and it is uncannily true. . Simply the Pareto principle states that, for the most part, roughly 80% of anything comes from 20% of the efforts. The concept was developed by Vilfredo Pareto in 1896. Pareto, an Italian economist, published papers showing that about 80% of the land in Italy was owned by about 20% of the people. Following this discovery, Pareto did surveys on a variety of other countries and found the same. Further research which showed a distribution of global income where 20% of the world's population controlled 82.7% of the world's income.

Why is this good for you to know? Your business is affected by this rule of thumb. If you examine your business closely you might find that 80% of sales come from about 20% of your sales efforts. The numbers will not be an exact 80-20 split but they will be close. One segment of my business is 80-14 and another section 80-18 but most are about 80-20.

Don"t forget, this rule applies to many segments of your business and that includes problem areas as well. Once you have studied your business for a while and discovered the 20% you can leverage this information to create more efficient ways to improve your processes. The process is simple. We measure, and that means everything.

For example, if you find the percent of your customers that are producing a major portion of your income, that type of person is your 'ideal' customer. The next step is simple, focus on developing more of that type of customer. Look for common denominators such as gender, age, location, and other things they have in common.

Don"t go crazy with this concept. It is only a rule of thumb. For example when considering the principle; 80 percent of 80 is 64% and 20 percent of 20 is 4% which implies a 64-4 rule for the upper portion of the original 80%. Taking efficiency to that level might make you less efficient as a business owner. The term 80-20 is only shorthand notation for the general principle at work. In some situations, as noted above, the distribution could just as well be, say, 80-14 or 80-18 and it might even work out to 80-30. There is no need for the two percents to add up to the number 100%, because they are measures of different things.

The key concept is to know your numbers and the elements that go with them. Then use those numbers to enhance your business efficiency.