Maybe Pareto had observed something far more significant than any of us thought…

You’ve all heard of Perato’s rule I’m sure, named after the Italian economist Vilfredo Pareto, who found that 80% of the land in Italy was owned by 20% of the population. However it was Joseph Moses Jurana management consultant and engineer principally remembered as an evangelist for quality management , born 2 years after Pareto made his observation, who recognised that the principle that 80% of the effects comes from 20% of the causes.

Or to put it another way – 80% of your results comes from 20% of your efforts so by dint the other 80% of your efforts only delivers 20% of the results.

Meetings

Richard Koch has written a whole series of books on how to use Perato’s rule in business and in life but the more interesting study perhaps comes from Perry Marshall who says that ‘the 80/20 is true of almost anything you can measure in business even down to customer service calls and sources of conflict’.

Marshall takes the principle even further though as he says that ‘if you dive down you’ll find that if you hire 10 sales people two (20%) will generate 80% of the sales. Which means that person for person these two people are sixteen times as effective as the other eight. And its very possible that the better of those two sales people is 50% better.’

So how can we best use that in business? Well not by ignoring the other eight and concentrating on the two unless that concentration is to model what they are doing so that the other eight can learn from it. Or as someone said in an article I read don’t make the terrific people more terrific help the mediocre people to get better.

If you look at your customer base broadly speaking 20% of your customers will drive 80% of your revenue. And of that 20% its highly possible that 20% drive 80% of that revenue and so on.

Is there correlation between the sales people and the amount spent, probably. But what can we learn from the buying patterns of that 20%, how can we leverage it to increase their order frequency and the average order value and then how can that be applied to the other 80%

Someone I was talking to at a networking meeting was bemoaning that a client needed a disproportionate amount of time compared to other clients but as they were significant income generators he was prepared to do that. But what that actually meant was he’s spending 80% of the time with the client problem solving so the real benefit of the business is far less since he’s not spending that time with other customers or building the business and the time expected to be spent on that client is greater than budgeted.

So if we start to look at the time spent resolving issues etc. how does that match the revenue? If we were to spend some time looking at this its very likely that we’ll be surprised that the real benefit of a customer is far less than we thought.
I don’t know about you but I’m going to start reviewing my business and that of my clients in a different way. And look for the 80/20 situations and how best these can be used. It may mean collating data in a different way or even using different metrics but the difference this can make to a business is significant.

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