The simple 80/20 principle Implement it and excel

I constantly read books covering a variety of subjects from self-help and motivational through to business management, and in this article I wanted to share two business principles that can be applied to virtually any sphere of your business. However, more importantly, when combining these two principle it can have a dramatic effect on your business. The 2 principle are as follows:

1)The Pareto Principle: You have no-doubt heard of the 80-20 rule whereby for many events 80 percent of the effects or outputs come from 20 percent of the causes or inputs. Some examples of the Pareto principle are given below:
*80 percent of the wealth is held by 20 percent of the population.
*80 percent of a company’s profits come from 20 percent of its customers
*80 percent of a company’s profits come from 20 percent of the time it’s staff spend

2)You cannot manage what you can’t measure. It seems easy enough but so many business owners ignore this simple principle and the end result is that they do not have the systems in place to be able to measure key performance indicators within their business, and hence do not know which areas to focus on.

Now how can applying these principles in your business lead to massive improvements?

Simple – look at your business across a multitude of measurements and try to identify the 20 percent of inputs or activities that result in 80 percent of various outputs. If you don’t have measurements then you better start because you can’t effectively manage what you don’t measure.

Perhaps one of the biggest areas of weakness is in properly managing inbound leads from marketing activities, right through to when they become a sale. You should know where the lead originated from such as via Google, your website, a referral, an existing client, a cold call etc. Knowing this will allow you to identify which is your largest source of leads and that will then allow you to try different things to increase the effectiveness and subsequent revenue from this source. Additionally by tracking leads to sales, you can identify key metrics such as your conversion rate, leads per month, average revenue per converted lead, reasons for lost sales etc. Knowing these will quickly allow you to identify problem areas, and more importantly address them and try new things to improve your overall company performance.

One powerful example of this is illustrated below:

If a business spends R10 000 a month on Google Adwords, and generates 100 enquiries, of which 10 convert into deals, at an average of R5000 per sale, then R50 000 is generated from R10 000 of adwords spent. However, by focusing on a few key areas and making some minor improvements, it is possible to create massive improvements. Some practical examples of improvements are:

1)Focusing on the top 20 percent of keywords, ensuring page content, meta tags, and page descriptions are all aligned and re-enforce the chosen top 20 percent of keywords, and
2)Adverts are specifically targeting a focused audience with a clear call to action, and
3)A three strike and out follow-up system for leads is put in place, and
4)Clients are offered items such as samples, free stock, promotional items etc.

If you are able to increase the number of leads from 100 to 130, and the number of converted deals to 20, then this same R10 000 spent on Adwords would yield R100 000. Thus a 30 percent increase in the number of leads, along with a 50 percent increase in conversions, leads to a doubling of revenue. Then deciding to double your monthly Adwords budget can lead to even higher increases in revenue.

This shows the power of combining the 80/20 principle with that of measuring key metrics and the massive potential it offers in improving your business performance.

There is a whole range of other areas you can apply these same principles:

Customers: Identify your top 20 percent of customers and look for ways to get them to buy more, cross-sell, give them an account manager whose sole job is to look after them etc. Additionally, identify the bottom 20 percent of your customers. Chances are that they don’t add to your bottom line but actually cost you more than they are worth in terms of time and resources they take up.

Expenses: Identify your top 20 percent of expenses responsible for the bulk of your expense bill and try identify ways to reduce these expenses.

Time: Perhaps one of the most important aspects. Find out what your top 20 percent of productive time is spent doing and find ways to improve your productivity on these. Additionally, by identifying the top 20 percent time-wasting activities and either delegating or outsourcing these, you can not only free-up your available time but make yourself more productive.

Employees: Identify your top 20 percent of employees. This can be across a range of metrics such as how much sales they bring in, how much they produce etc. Decide who is worth keeping and investing in, and which do not add anything to your company.

Once you grasp the simplicity of these principles you understand that by applying it throughout your business you can focus on the factors that matter and by leveraging these, have a much greater impact on your bottom line.