Steve Ballmer, a former Microsoft CEO, once said that 80% of errors and crashes in Microsoft products come from 20% of the bugs. The reason for this is the 80/20 rule. The rule was propounded by an Italian Economist, Vilfredo Pareto, in 1895. He called it the Pareto principle. We call it the 80/20 rule. It says that “80% of the outcome of any activity comes from 20% of the efforts”.
Simply put, 20% of your activities will account for 80% of your results. You can also apply this principle to almost any situation: A few criminals commit most of the crimes. A handful of drivers cause most of the traffic accidents. A few products generate 80% of business sales, and a few employees are responsible for most of the company’s results.
In spite of the popularity of the 80/20 rule in large businesses, only a few small businesses apply the principle because they don’t seem to understand it.
To effectively apply this principle and ensure the success of your small business, here are things you should do:
Get smart with your business ideas
When starting a new business, most people often make the mistake of looking for any good business idea. What you need is not just a good business idea, but a profitable business idea. The trick is to focus on a few business ideas that resonate with you and catches the attention of your clients.
To apply the rule, generate a list of all your business ideas. Next, select the top 20% ideas that resonate with you, then focus 80% of your efforts on these few ideas so you can determine the one that actually fills the need of your ideal clients. That’s how to pick the right business idea that satisfies a need and is equally profitable.
Keep the right employees
In most cases, the achievement of a company is a result of the hard work put in by the employees. Many small business people often face the challenge of how to figure out such employees, and to keep them. The 80/20 rule helps to do that precisely. According to the 80/20 rule, 80% of your company’s results are produced by 20% of employees.
In applying the rule, you should put in place an effective performance management system that will provide performance reports of the top 20% of employees and the bottom 20%. Then you can review these reports quarterly, half-yearly, and annually. By this, you are able to identify, build, and keep the right staff. You can also isolate and let go of under-performing staff to save costs and grow profits.
Focus on the top 20% of your customers
When I teach small business classes, I often ask participants, “Who are your customers? Who will buy your product?” But I’m often surprised that many small business people assume that ‘everyone’ will buy from them. Assumptions like this lead to wrong marketing and pricing strategies because only a limited number of people will actually buy from you. It’s better to identify your target market instead of assuming that everyone will buy from you, or trying to create a product for everyone.
In applying this rule to your business, you should create a profile of your target customers, then determine the top 20% of your customers using sales and profit records. After that, focus 80% of your service and marketing efforts towards this key customer group.
In my coaching business, for example, we noticed that 80% of the sales come from 20% of our target market – experienced professionals. So we focus 80% of our efforts on this key customer group, helping to turn the transformation experience they already have into a coaching business online. This focus eliminated a chunk of the market, but it also gave us a ‘niche’ to capitalize on. This method helped us build a better and stronger business.
Build quality into your business services
As small business people, building quality into your business services is a part of the journey. Having to deal with so many process defects at the same time is a lot of challenges. According to the 80/20 rule, 20% of process defects will result in an 80% quality loss in your business. Simply put, the principle is telling us to concentrate on diagnosing the few defects that are causing most of the quality problems.
In applying the rule, identify all the sources of defects. Rather than tackle all the sources of defects at once, determine the ‘vital few’ that are creating the quality loss. Then remedy the most critical 20% defect sources to build 80% quality improvements into your business services.
You can also make changes by identifying high-impact processes, and reinforce them with more resources while reducing the resources used in running under-performing or low-impact processes.
The major thing to learn is that you can isolate where your business is really getting results and where it is not. If you focus on the vital few key results areas, not on the trivial many, you will achieve 80% business improvements. The exciting part is that any small business can apply this principle to almost any situation and gain immensely.
As an individual, you can also use the 80/20 rule to prioritize your tasks and plans for the coming days, weeks, months, and years.