Oli Gibson

In my last post I explained the 80/20 principle and how it could be interpreted. If you haven’t already read this post you can find it here – The 80/20 Principle.

So how can you apply the 80/20 principle to your business to make your life easier and to increase your profits?

Sounds to good to be true doesn’t it? But I promise you it isn’t, I can reduce your work load by 80% and in all the extra time you’ll have you can watch your profits grow!

Let me play out a scenario for you. You run a company with 100 customers. To apply the 80/20 principle you analyse those 100 customers and realise that over 80% of your profits come from only 20 of those 100 customers. (obviously it may not be 20% of your customers that make up 80% of your profits, you may find it to be 10% or maybe as low as 5% but it will almost certainly be 20% or less). You also notice that 3 of your customers take up a disproportionate amount of time.

Now here’s what I suggest you do. First take control and fire the three customers who take up all your time as long as they don’t contribute more than 10% to your bottom line, do it NOW! Most business people take the stance that the customer is always right but remember they’re not if they don’t contribute significantly to you when costing you a huge amount of time and stressing you and your workers. Obviously you’ll take a small financial hit initially by firing a couple of customers but trust me you will make this up and more with no problems with the huge amount of time you’ve created yourself.

Now you know over 80% of your profits come from less than 20% of your customers (lets call them the A group). These are the people to focus on. That doesn’t mean spending all your waking hours pestering them, simply to remember that these are the customers you need to keep. You will probably find that these are also the easiest customers to deal with and satisfy because they know what they want and how much they want etc, you just need to supply them at the right price.

Next step. Look at your remaining customer base, you’ll find most of them would order from you wether you chased them up or not. I find a lot of people are spending almost 90% of their time contacting and chasing clients that they don’t need to, especially considering the financial benefit is very small. Stop contacting these customers. Allow them to contact you and order from you whenever they like but don’t waste your time contacting them, very few will stop ordering from you and even if a couple do the loss in revenue is minimal compared to the time you save.

Finally you should profile the customers in ‘the A group’. It’s likely they have similarities that make them such good customers for you. Identify their common characteristics and then go out and secure more customers that fit those characteristics. The key thing to remember here is not to go mad, only bring in 3-4 new customers to start with otherwise you’ll be back to square one, more customers does not necessarily mean more income.

End result? You have reduced the amount of time you spend working by at least 80% and the customers you now have are good quality ones. I can almost guarantee you will see your profits increase soon after you implement this, even though you had to take a small reduction to start with. Plus the fact you now have more time to focus on developing the business and pushing it forwards.

If you have any questions about anything I have discussed here leave a comment below or you can message me on twitter @oligibson

Over 100 years ago the economist / sociologist Vilfredo Pareto published his seminal works, cours d’economie politique which included a little explored law of income distribution that would later come to be known as Pareto’s Law. This mathematical formula was used to demonstrate the uneven distribution of wealth in society and stated that 80% of the wealth and income was generated and possessed by only 20% of the poppulation. This law later became known as the 80/20 principle.

So what has this economic formula got to do with anything other than the distribution of worldwide wealth? Well a lot actually!

In fact the 80/20 law can be applied to almost anything, for example…

• 80% of peas produced come from 20% of pea pods
• 80% of the consequences come from 20% of the causes
• 80% of the results come from 20% of the time and effort
• 80% of a companies profits come from 20% of the products and customers.

You can see there this is going. By rewriting the 80/20 principle it can applied to anything, specifically business productivity.

80% of the outputs result from 20% of the inputs

The list of ways to use the principle is probably infinite and the ratio is often skewed even more severely, 90/10, 95/5 are not uncommon but the minimum ratio to seek is 80/20.

So for the moment, ask yourself the following two questions…

1. Which 20% of sources generate 80% of my problems?
2. Which 20% of sources generate 80% of my outcomes and resulting happiness?

In the second part to this article I will explain how you can apply the 80/20 to reduce your work load and double your profits. In the mean time you can follow me on twitter @oligibson or if you have any questions about anything I’ve discussed just leave a comment.