The Pareto Principle is, simply put, a way of looking at how your life is structured. On a very basic level, it states that we, roughly speaking, achieve 80% of our results in any endeavor from 20% of the work that we do.
In a typical, everyday context, this can be related to gardening. If we spend say, five hours gardening, this means that for those five hours, 80% of what we achieve in that garden will be a direct outcome of 20% of the activity we initiated. This might mean that we have a flower bed cleared of weeds and not much else, but it will be the most visible and effective work we have done, even though for most of the time we will have carried things here and there, done some pruning, cleared rubbish and so on.
When we apply this to our business, the principle becomes a lot more exciting. This is because it allows managers and business people, in general, to look at the work they do on a daily basis and literally cut out the wastage. It will enable us to focus on what we are doing that gets results, and noting the activity that we are indulging in that is really not proving effective in any way.
For businesses looking to grow, the general statement “We need to find more customers” can become a precarious sales directive. What businesses need to strive for are the right customers, ones that drive profitability upward. This brings us to the following question; who are these “right” customers? Applying the Pareto Principle, also known as the 80/20 Rule, you can easily define who the right customers are for your business.
The business-management consultant Joseph Juran asserted in 1941 than 80% of the effects come from 20% of the causes. Juran dubbed the principle “Pareto’s Principle” after the Italian economist Vilfredo Pareto whom in 1906 observed that 80% of the land in Italy was owned by 20% of the population.
While the Pareto Principle has seen a few decades pass since its inception, the theory behind the principle is timeless. Some business examples of the Pareto Principle are:
A Pareto analysis will underscore the market’s perception if the business by identifying the key products or customer demographics. Through the actions of your customers, the Pareto Principle will help you to refine the business’ model to satisfy the market further. The influence of the Pareto Principle within the business will appear in the tactical planning for sales and marketing, departmental staffing, product or service design and inventory allocation.
How can this simple principle help my business? Focusing on key customers provides reductions in transaction costs and operational complexity. Marketing programs can be cost-effectively scaled to reach potential customers of similar makeup or demographics as your key customers. As the number of transactions and operational complexity decreases, an opportunity will present itself to re-allocate staff to maximize their contributions. Determining the key products, excluding complimentary offerings, provides an opportunity to simplify services and reduce product varieties. Reduction in product or service variety will allow narrower inventories resulting in better cash flows.
What happens to the Customers we discourage over time? With any luck these ex-customers will gravitate toward the competition, increasing their lead time and costs.
Operational complexity is a businesses’ worst enemy. Not only is complexity challenging for the employees, complexity can quickly become frustrating for customers. The Pareto Principle will help identify opportunities to simplify and allow the business to truly focus on the needs of the customer!
Would you rather be part of the 20% who are not successful or see 20% of your efforts generating 80% of your success? When managing your business, take a look at what you do on a daily basis, and remember to focus 80% of your time and energy on the 20% of activities which are the most important for the successful outcome of the business. Through the application of the Pareto Principle in conjunction with lean methodologies, an active and customer-centered operation will quickly emerge.
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