Growing Your Small Business With The 80/20 Principle
by Michael Cage
Over 100 years ago, Italian economist Vilfredo Pareto observed that the majority of his country’s wealth was controlled by a minority of his country’s population. He found the same imbalance in other countries, and observed that the ratio stood at 80% of the wealth controlled by 20% of the population.
In economist-speak, Pareto’s actual words were:
“In any series of elements to be controlled, a selected small fraction in terms of number of elements almost always accounts for a large fraction in terms of effect.”
Forty years later, management guru Joseph Juran took Pareto’s observations out of the realm of economics. Juran talked about the “vital few and trivial many.” In other words, for any goal 20% of your actions are vital and 80% are trivial, because the vital 20% will produce 80% of the results you want.
Today, we call this the 80/20 Principle.
By systematically applying the 80/20 Principle to your business, reducing the trivial many while putting more time and resources into the vital few, you can achieve any goal you have. Faster and with less waste.
Of course, the most common business application of the 80/20 rule has to do with your clients. You identify the 20% of your clients who produce 80% of your profits. Then, set out to get more clients like the 20% and let the least profitable clients go.
But the value of the 80/20 Principle goes far beyond this single application. To quote Richard Koch, best-selling author of “The 80/20 Principle”:
“The 80/20 Principle can and should be used by every intelligent person in their daily life, by every organization, and by every social grouping and form of society. It can help individuals and groups achieve much more, with much less effort. The 80/20 Principle can raise personal effectiveness and happiness. It can multiply the profitability of corporations and the effectiveness of any organization.”
Small business owners regularly waste time and resources on activities that do not produce great results. Without constant analysis of your actions and results, this will not change. The 80/20 Principle gives you an easy way to look at what you do and how to improve your results.
Let’s go over 5 “under-the-surface” ways to use the 80/20 Principle to grow your business and improve your peace of mind.
Crank your personal productivity to new heights. Apply the 80/20 rule to your own daily activities. You’ll find 20% of the things you do result in the most powerful business results. Take the other 80% and do one of the following 3 things: a) delegate it to an assistant, b) outsource it to a 3rd party, or c) stop doing it. When you focus your attention on the actions that contribute most to your business, growth will soar.
Focus your marketing on the right problems. Make a list of the most common problems or goals that cause a new client to seek you out. Find the 20% of problems or goals that produce 80% of your new clients. Then, write articles, create educational material and craft marketing campaigns to position your business as the “go-to firm” for those problems and goals.
Make better employee decisions. The usefulness of the 80/20 Principle does not stop with you. If you have salespeople, apply it to their activities. What produces the most sales? Engineer ways for them to spend more time on those activities and less on things that don’t put money in the bank.
Improve your advertising. Applying the 80/20 rule to your advertising will reveal a disproportionate amount of business coming from only a few sources. Do “more, bigger, and more frequent” advertising where it produces the best results. Improve or get rid of the poor performing advertising.
Grow your referrals and generate positive word-of-mouth. Dallas Cowboy’s ex-coach Jimmy Johnson once remarked that if a star player fell asleep in a meeting, they’d laugh about it. If a marginal player fell asleep in a meeting, he’d pack his bags the same day. To maximize referrals and word-of-mouth, you should not treat all your clients the same. 80% of your referrals will be delivered by 20% of your clients. Reward these referrers with special perks and benefits, and watch them turn from enthusiastic to evangelical about your business.
Plan your business growth. What will cause 80% of the problems for your clients in the next year? Find ways to solve those problems, communicate what you have done to your clients, and be there when they need you. Because most businesses are woefully reactive, not proactive, this will put you far ahead of the competition.
Reduce your headaches and make business fun again. The life of a small business owner is hectic, but it doesn’t need to be endlessly stressful. What are the 20% of problems or people who cause 80% of the stress in running your business? Once you know, reduce, eliminate or delegate the stressors; and get back to enjoying your life.