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The Pareto principle is the rule of the ‘vital few and the trivial many’ and was named after Vilfredo Pareto, an Italian economist.
He observed in 1906 that 20% of the Italian population owned 80% of Italy’s wealth. He then noticed that 20% of the pea pods in his garden accounted for 80% of his pea crop each year.
He then concluded that this approximate ratio of 80% and 20% can be applied to almost any phenomena that occurs.
In this podcast we will explore how the Pareto principle can help us:
- Figure out which customers are responsible for the bulk of your revenue
- Figure out which customers are responsible for the bulk of your problems.
- Identify what affects your results the most
- Identify how much of your to-do list you are able to complete on an average
- Figure out how to be more successful as a salesperson
Some principles to keep in mind:
- A small number of causes is responsible for a large percentage of the effect-usually a 20-percent to 80-percent ratio.
- You can apply this ratio to almost anything, from the science of management to the physical world
- Addressing the most troublesome 20% of the problem will solve 80% of it.
- Within your process, 20% of the individuals will cause 80% of your headaches.
- Of all the solutions you identify, about 20% are likely to remain viable after adequate analysis.
- 80% of the work is usually done by 20% of the people.
1. 20% of your customers provide 80% of the revenue
Go through your existing client list and look at the rank them in order from the most revenue generating to the least.
You will find that 20% of your clients are responsible for 80% of your revenue.
This means that if you have 100 clients, 20 of them will be responsible for 80% of the total sales of this group.
Now make a separate list of these 20 clients or your 20%, what can you do to get more business from these customers, how can you satisfy them more.
What offerings or products can you design especially for them?
How can you thank and reward them?
Remember that if they are responsible for 80% of your income, then you need to spend 80% of your time (the time you spend on existing accounts) on these customers rather than on the 80 that don’t matter as much.
2. 20% of your customers cause 80% of your problems
Go through your existing client list again and identify the top 20 problem customers. Chances are that if you have 100 clients, around 20 of them will cause the most problems for you.
You can now focus your efforts on solving the problems of those customers who overlap with your 80% revenue list or choosing to let go of the customers that are not on that list. (You may find that the problems they cause you are not worth the revenue you make from them).
You can also see if there is a common problem amongst these 20 customers or spend time solving the issues associated with these customers and hence eliminating 80% of your worries in one shot.
3.20% of your time produces 80% of your results
If you were to look at the things you spend your day doing, you would realise that what you spend 20% of your time doing, is responsible for 80% of your results. For example the 4 hours a week that you spend calling and fixing appointments, may well be responsible for 80% of your sales. Take a look at the activities that you do on a weekly basis and circle the top 20% that contribute most to your results. You should ideally do these activities first, or spend more time doing them if you want to impact your results positively. If we use the example above, increasing the number of hours we spend fixing appointments will positively impact our sales much more than any other marketing or branding efforts.
4. 20% of your to-do list is completed 80% of the time
Another way to apply the Pareto principle is to take a good look at your to do list. If you have 10 items on your to do list on an average, chances are that on most days you will complete only 2 of those items on your list. This way when you are deciding what to work on for the day, circle only 20% of your most important items and do those first rather than concentrating on the one’s that are not important. This ensures that you are able to complete your most important tasks first versus the ones that are not so critical.
5. 80% of your success will depend on 20% of your efforts
if you look at the things that bring you success, you will realise that only 20% of your effort is responsible for this success.
For example if you are on a strict weight loss program, you will find that only 20% of your diet or exercise program will be responsible for 80% of your weight loss.
If you can figure out the 20% of effort that is responsible for 80% of your success you can do more of the things that matter and less of the things that don’t matter.