A version of this article first appeared at Inc.com.Discover the specific strategies your business needs to succeed. Get details here.
Most of us have bumped into the Pareto Principle at some point: simply put, it states that in any given situation, 80% of effects come from 20% of the causes.
In business, we’re most frequently aware of the Pareto Principle at work when dealing with our customers or clients. We’re all familiar with the notion that a small number of our customers typically generate a high percentage of sales and profitability. Take a look at your own customer or client list and you’ll likely be surprised how closely the numbers hold true – that the top 20% do in fact generate 80% of your revenues and/or profits.
As a result, it’s often these VIP clients and customers who receive a disproportionate amount of our time and attention. They get dedicated service lines, faster turn-around, priority access, better discounts – a whole wealth of features and benefits that wouldn’t be cost efficient to provide to the entire customer base.
All well and good, but did you know that the Pareto Principle also holds the key to rapidly accelerating the growth of your business next year, by showing you how to free up resources and discard much of the dead weight that has been holding you back?
To unleash the hidden power of the Pareto Principle, all it takes is to recognize that as well as applying to positive cause-and-effect dynamics (like top customer lists), the principle applies in reverse – to negative, time- and resource-consuming activities as well. Here are just three examples, which if you apply them will free up a lot of resources to fuel your growth next year:
1. The bottom 20% of your customer or client list.
The simplest extension of the Pareto Principle is to reverse its application to your client list: just as the top 20% deliver 80% of your revenues or profits, so too, the bottom 20% will generate 80% of your service calls and remedial work. In other words, the bottom 20% will cause you 80% of the grief.
Take a hard look at that troublesome (and trouble-creating) bottom 20% – what would happen to your business’ ability to service the rest of your customers – and your ability to grow the company – if you diplomatically shed them?
Industry leaders regularly cull their client and customer lists to focus only on those who fit their ideal customer profile, and you should consider doing so, too.
2. The 80% long tail of your purchases and supplies.
If your accounting system will allow it, print out a list of all suppliers and vendors you paid this year.
Guess what applies to 80% of that lengthy list? Yep, our friend Pareto, who tells us that that ‘long tail’ of suppliers and vendors is supplying you with only 20% of your needed goods and services – and is therefore eating up administrative time and energy processing a massive amount of invoices, statements and payments – all for a relatively small percentage of your total purchasing needs.
Take a look at how you can cull this list too: Can you consolidate purchases from other suppliers, or plan ahead so you don’t need to scrabble around looking for a supplier at the last minute, or find a wholesaler that stocks a half-dozen or dozen of the products you’re currently getting from many different sources?
3. Product list review.
We all tend to bring a degree of emotion to any review of our product or service offering. After all, these products and services are what got us here – they’re what the business is founded on. And as a result, we often find ourselves developing over time a sprawling list of products and services, added to over the years without any real thought of discontinuing those that are yielding little return.
Make a start by applying Pareto. First off, identify the top 20% which deliver 80% of your revenue (or profits). So far, so good.
Now for the difficult bit – what about the ‘reverse Pareto’ – what about the bottom 80% of products and services that are only supplying 20% of your sales or profits? It may be that there are good reasons why one or two of those products or services should survive a ‘Pareto Review’ (cross-selling, up-selling, retains legacy customers, for example), but you should at least force yourself to go through the process.
These are just three examples of where a Pareto review can help you free up energy and resources to focus on growing your business next year – I’m sure you can think of some others. Care to share your ideas with us in the comments below?
Discover the specific strategies your business needs to succeed. Get details here.