Why the Pareto Principle (80/20 rule) is good for business.

A pattern shows up in the world. It’s a pattern that is difficult to prove but easy to observe. Even though it’s easy to observe it is not one that people guess by instinct. The pattern is observed is that in most instances, very few causes are the reason for a result. To be more specific, it turns out that 80% of the results are from 20% of the causes.

  • 80% of the revenue comes from 20% of the customers
  • 80% of customer service calls come from 20% of customers
  • 20% of your time produces 80% of your results
  • 80% of traffic lands on 20% of your website pages
  • And so on.

That’s the Pareto Principle. It’s also called the law of the vital few. A cool Italian economist, Vilfredo Pareto, came up with it in 1906.

If you can figure out what is that 20% that produces most results, why not spend more time on those activities and less time on others? If you do, your business will grow. This is one of the key working principles at Clearly Payments.

The key is to really make sure you prioritize. Whether it’s prioritizing in creativity work, project management, coding, lawn care, shoe polishing, use the 80/20 rule to help. Remember, it is a principle (aka trend), not a law.

To prioritize properly and use the 80/20 rule, you need data. Don’t base decisions purely on gut. For example, if your gut says 80% of the revenue comes from 20% of the customers, test it. Look at those 20% of customers, analyze their characteristics, and define them. Use that definition to go for more of them, continually repeating that process, and continually improving your business. Do that in all aspects and all departments of your business. When you look at the data, you will find the Pareto principle is many aspects of your business. Use that power and turn it into actions and even a company strategy.

Remember that big competitive advantages can come from small improvements. That’s something that chaos theory demonstrates, which is a theory that helps explain the Pareto Principle. Some people think you need to be 10 times better to win. This is not the case; only small, hopefully continual, improvements are needed. For example, if you have a goldfish in a pond that is only 10% better, that extra 10% in size, speed, or strength will lead to a disproportionate consumption of the available food. This can eventually result in being a the massive fish of the pond. Find the 20% that makes a difference and win.