80 / 20 Principle

Have you ever noticed that a handful of good clients are responsible for a much larger portion of your sales? Do you have a client who gives you more issues then many of your other clients combined.

In business terms this is called the 80/20 Rule. Defined simply, it means that 80% of your sales come from 20% of your clients, or products. With a sales staff, 80% of sales come from 20% of the salespeople. Another example is 80% of your client issues come from 20% of your clients. The common definition is: that, for many events, roughly 80% of the effects come from 20% of the causes.

Today many corporations often use the Rule to determine the inefficiencies in an operation.  The Rule is very helpful in identifying what products are selling more, and what products may not even be worth producing anymore. Now the numbers may not always work out to 80/20, sometimes it is 70/30 or 95/5, but the principle will hold true often.

The 80/20 Rule is often referred as the 80/20 principle, the Law of the Few, or Pareto’s Principle named for Vilfredo Pareto, an Italian economist in the early 1900’s. Pareto actually never used the term 80/20, but what he studied set the ground work for the rule.

Pareto was analyzing economic data, mainly concerned with land ownership and income in Italy. What he realized was 80% of the land was in the hands of 20% of the population. Pareto studied many countries and then looked thru history and kept coming to the same conclusion regarding wealth and property ownership. He even studied the pea pods in his garden to see that only 20% contained the peas.

It was Management consultant Joseph M. Juran who named the principle for Pareto. Richard Koch in his 1998 best selling business book, The 80/20 Principle popularized the term for modern times. Koch, a business consultant formerly of Bain and Co. learned the power of 80/20 first hand watching Bill Bain himself in action in the 1980’s.

Koch described Bain as one the smartest people he ever met, but also the laziest. When most consulting firms concentrated on getting experienced employees and many accounts, Bain went against the tide. He hired the most brilliant young business talent he could find (they came cheap), let them do their job and concentrated on a few very big accounts. Those accounts were given excellent service and as their companies grew, they kept re-hiring Bain and Co. for more expensive projects.

The 80/20 Rule is so valuable and very easy to apply to any business. If you study your current situation, you’ll probably see who are the most valuable clients in your business. You can analyze your day, your employees, your product or service and figure out what you should be putting more time into, and what should be cast away. For example, Microsoft noted that by fixing the top 20% of the most-reported bugs, 80% of the related errors and crashes in a given system would be eliminated.

There are so many hours in a day and time management is crucial to every successful organization. If you are wasting too much time on inefficient tasks, you will always struggle to grow. The 20% of your clients that are giving you 80% of your issues may need to go. It may make sense just to fire those clients and redirect that energy to more productive goals.

The 80/20 Rule goes hand in hand with another popular work (and life) slogan – ‘Work Smarter, not Harder’. Do not mistake activity for results. Anyone can keep themselves busy at work checking email or surfing the web reading the wrong stuff.  You need to be doing valuable productive work to lead to success.

Not every hour or task is the same in your day. Not every phone call you take is equal. Not every investment is equal. Would you rather have put your money in Google or Blockbuster?

You are the only one who controls your day, your time and your life. Take a moment to think each day if you are working on the most important and productive thing you can. Good work compounds and multiplies to great results.






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