The 80/20 Rule
The 80/20 rule, officially named the Pareto principle, states that, “for many events”, 80 percent of the outcomes occurs from 20 percent of the source/causes. The name of the 80/20 rule comes from the observation of the economist Vilfredo Pareto, who published a paper which showed that approximately 80 percent of the territory in England or Italy was in the ownership of 20 percent of the people.
In business, the Pareto principle is a common rule of thumb showing that 80% of a company’s sales come from 20% of its clients. Savvy entrepreneurs can use it to determine what characteristics are common for those valuable customers and focus on finding more clients that fit that same pattern.
In addition, the Pareto principle is used to help managers figure out which aspects of their business should receive the most attention – the 20% of activities that generate 80% of a company’s profit/output. The greatest resources should be allocated to support the input factors that influence the company’s final results the most.
The 80/20 rule can also be used for better time management. It reminds people to pay attention to the 20 percent that really matters. Of all the tasks a person performs during the day, only a small amount will produce 80% of rewards. It’s critical to identify those essential tasks and pay more attention to them in order to boost productivity. It helps entrepreneurs not only manage effectively, but also work smarter instead of harder.
The Pareto principle can also be used to better assess your staff. Business owners can exploit it to identify top performers – the 20 percent of employees that bring in most clients, generate the highest profits and solve the company’s most pressing issues. Recognition is key when it comes to employee retention, so entrepreneurs must make sure their most valuable people feel appreciated and properly compensated for their efforts.
The important thing to remember when applying the 80/20 rule is to not get too caught up on the numbers. Both 80 and 20 are simple example of one type of uneven balances. When it comes to your business or your time, the balance can vary. Your aim should be to identify the key 5, 10 or 40 percent of inputs that are creating most of rewards, prioritize those activities, and find ways to downplay or eliminate the rest.
But I still have to do it…
A common argument against the 80/20 rule goes something in the lines of “some tasks may be less valuable, but they still need to get done.” This is true to a degree. There are always things that need to get done, even though they are of little importance – like answering emails or conducting meetings. If you stop reading your email, for instance, you could miss out on professional and networking opportunities.
However, as an entrepreneur, you are the only one who can adjust how you spend your time. If email isn’t that important, hire a personal assistant to manage it. If meetings aren’t particularly effective, hold shorter ones, with a clear agenda.
There are only a handful of daily activities that produce the most results. To maximize performance, business owners should follow the 80/20 rule and direct their best energy towards what really matters.