Pareto Principle

Father of the 80/20 rule of business

Vilfredo Pareto is one of my favourite historical people. He was a civil engineer, political scientist, philosopher, sociologist and economist. His impact on economics is still with us today. His work on income distribution is known to us all as he is the father of the 80/20 rule. Partly because of him, the field of economics evolved from a branch of moral philosophy into a data intensive field of scientific research and mathematical equations.

So how does the 80/20 rule translate into your business you ask. It translates into knowledge of where to focus your efforts. 20% of your customers are in general bringing you 80% of your revenue. Once you find out who the 20% are you can focus your efforts on them. The 80% who bring you only 20% of your revenue are taking up more of your time than the big spenders. They need to be either converted into big spenders or you need to get rid of them or funnel them somewhere else where they don’t occupy 80% of your time.

This principle reflects everything you do. In customer support, it’s who’s calling you the most, who are usually the ones paying the least. In sales it’s the prospects who are not converting that demand 80% of your time – you need to learn how to convert more and so spend less time. In marketing, you need to spend 80% of your time addressing the market that is actually spending money with you, not the masses who won’t buy.

When my kids were small we didn’t have a lot of money. So we spent more time window shopping than doing any actual shopping. As a business, you need to identify and focus on the 20% of buying time not the window shopping time.