In 1906, Italian economist Vilfredo Pareto noticed that 80% of Italian land was owned by 20% of the population.
He was intrigued by this, and started to look at other areas of life too. So he did what any sensible economist would do and went to look closely at his garden.
There, Pareto saw that 20% of the pea pods in his vegetable plot contained 80% of the peas.
The 80/20 principle is a common rule in business too. (It won’t be exactly 80/20 – more like ‘big number/small number’ – but you get the idea.)
This means that you can dramatically improve your productivity and profitability by focusing on the right stuff.
- 80% of your profits come from 20% of your customers.
- 80% of your headaches come from 20% of your customers.
- 80% of your sales come from 20% of your products.
There are lots of other examples too, but we’ll focus on these today because that’s where your biggest wins can come from.
So, what to do?
First, I recommend that you do a little customer sales analysis and find out which are your most profitable customers.
Put some extra effort into contacting these customers – not just now, but in the future too. They’ve proved themselves to be worth a lot to you, so give them the attention they deserve.
Second, identify the customers that cause you the most problems. We all have them: they’re late payers, they take up loads of your time with trivial stuff, and they’re always after a discount.
Then ditch them.
That’s right: stop doing business with them. They’re not worth much to you, and when they do put business your way it’s such a hassle that it’s barely worth it.
My business got a lot more profitable and fun, and less stressful, when I sacked my worst clients. It was scary, yes. I was worried at the time. But it was a great decision and I absolutely don’t regret it.
Third, find out what your most profitable products or services are and develop them. How can you make them better? How can you adapt them to appeal to more customers?
What are your least profitable products or services? I bet you’ll find they’re also the ones that are the most annoying to provide.
Or they’re the least relevant to your core business. Perhaps you tried them on a whim? Which is fine, but it’s important to let go of your whims when you find they’re not worth pursuing.
Perhaps most excitingly from a personal point of view, though, you can apply the 80/20 principle to your time, too.
If you look closely at your activities, you’ll probably find that 20% of the stuff you do daily produces 80% of your results, whether that’s at work or at play.
So start keeping a brief diary of what you’re doing with your day. Be brutally honest. Record every time you check your emails, wander onto Facebook or have a quick sneaky go at Angry Birds.
You’ll probably be shocked – I was when I did this exercise for the first time.
But it was one of the best things I did. I wouldn’t say I’m the most organised and productive person on the planet, but I’m certainly up there in the top 20%.
You could be too.
PS Speaking of 80/20, there’s an area of your marketing that will definitely bring in a lot of profit for very little ongoing work. I’ll tell you more in the next blog post