“The 80/20 Principle is the cornerstone of results based living.”
Tim Ferris – Life Style Design Expert and Author of The Four Hour Work Week
I just got back from the 3 Days to Success Mastermind Program that I hosted in Las Vegas and I want to thank the brilliant group of lawyers, doctors, psychologists, and business men and women, who participated. Together we generated a brilliant, million dollar string of breakthroughs, ideas, strategies and tactics for building and managing business and life.
Now… we want to share some of those concepts with you.
As we have been chatting over the last few weeks since the program, almost everyone has reported that many of the best and most powerful ideas that they have implemented so far, have been those we developed while working on the idea of Pareto’s Principal or the 80/20 Rule.
During the mastermind, we focused on meta strategies to boost the profitability of our businesses and the qualities of our lives. These meta strategies help us to use tactics and methods for maximum leverage with minimal effort. So what is a meta strategy? What is the 80/20 rule? And how do you apply them to quickly improve both your business and life?
Meta strategies are those that generally help to guide strategic decisions. For example, before building a marketing campaign to attract more clients, make sure that you have really and truly identified your optimal client. When deciding how to spend marketing money, determine what is already working. Then do more of what’s working, and do less of what’s not working.
Make your strategies serve your desired outcome. Then do more of what is working and eliminate what’s not working.
Does that sound ridiculous? Really? Do you do it? Do you actually take the time to determine what is working and increase that? When was the last time you stopped doing something that wasn’t really working any more?
Often, and incredibly, people and organizations often do just the opposite. I was recently working with a company that was getting great results from a direct marketing program. It was expensive, but profitable. But, they decided to cut the number of letters that they mailed to “bring costs under control.” Amazingly, the results began to diminish. And so did profits.
So let’s look at what’s working and do more of that. Is that it?
The 80/20 Rule
Amazingly, there is an economic law or principle, first observed and described by an Italian economist Vilfredo Pareto. Pareto essentially discovered that there is a built in imbalance across systems between causes and effects, inputs and outputs. This has been proven over and over again since.
80 percent of most sales come from 20 percent of products. 80 percent of crimes are committed by 20 percent of criminals. 80 percent of most business profits come from 20 percent of customers. In our personal lives the effect is equally profound. 20 percent of our clothing is worn 80 percent of the time. 20 percent of computer applications are used 80 percent of the time (an observation that IBM and Apple have put to very good use through time to make their devices more user friendly and efficient).
It goes on and on.
But if we really make an effort to decide who we want to work with, the products we want to support, and how we want to work, it is possible, by using this principle, to build a more effective and efficient business that is more profitable and allows.
However, the 80/20 rule is counter intuitive. It seems like fifty percent of our efforts should yield fifty percent of profit. In truth, when we see the true imbalance, (if we ever really notice it) we are often shocked. And this is especially true, since the 80/20 rule is merely an approximation. Often, 90 percent of profits come from 10 percent of clients or customers.
So how do we learn to use the principle to our advantage?
First, just think about it. If you could really identify the 20 percent of products that produced 80 percent of profit, you could eliminate 80 percent of your marketing budget and still produce the vast bulk of sales. And, what if you really knew the nature and quality of the top 20 percent of clients and spent more time, and energy cultivating those existing clients/customers to buy more, to refer more, and to bring in more new clients of the same type?
The math becomes pretty exciting pretty fast. Would you need fewer resources to serve only 20 percent? Could you offer them an even better experience? Could you focus on the 20 percent of them that referred 80 percent of your referrals? Would that be radically more profitable and more enjoyable?
Sometimes, people get the wrong idea. In his book on the topic, Richard Koch observes that a book store that only carried the top ten best sellers would quickly find itself in trouble. Why? Don’t most sales come from just a few books? Yes and no. Many books sell well through time. But, more importantly, the top book buyers (the 20% that give 80% of the profits to book stores) want a reasonable selection of books when they go to the bookstore for the book buying experience.
Likewise, only a small number of movies account for almost all of Hollywood’s profits. But movie goers do see more than those few and need to stay engaged by the theater chains.
Ok, this now sounds too complex. How you ask, can you actually use it?
Here are a few ways:
1. Try to become great at a few things rather than good at many.
2. Always be on the look out for data that tells you what the biggest sellers are and put more effort into those.
3. Look at products and then customers – where does the money really come from? If you cannot tell start gathering data.
4. Delegate and outsource those tasks that don’t support the best use of your time (the 20% that yields 80%).
5. Refer (for a fee or some benefit) the 80% of work that yields very little profit.
6. When something is working really well, dedicate more resources to that and eliminate or reduce what is less effective/profitable.
7. Notice which key words get the most traffic that BUYS or signs up and build more traffic on those words.
8. Start using these principles to change your business to be better adapted to current market conditions and the lifestyle you want.
9. Do these things in your business and your personal life.
Pick just one or two from above but make an educated guess about which of those will make the biggest difference in your business and life.
Photo Credit: MyAngelG