The Pareto Principle: Applying the 80/20 Rule to Your Business

  |  March 11, 2002   |  Comments

A small portion of your business is generating the bulk of productivity and profitability. That's the Pareto principle. Your job is to identify and leverage it. Here's how.

Italian economist Vilfredo Federico Damaso Pareto observed in 1906 that 80 percent of the land in Italy was owned by 20 percent of the population. Later, he observed this noteworthy ratio seemed to apply to other parts of life, such as gardening: 80 percent of his peas were produced by 20 percent of the peapods. Over time, this concept has come to be known as the "Pareto Principle," "The 80/20 Rule," and even "The Vital Few and Trivial Many Rule." Interestingly, another of Pareto's most noteworthy and controversial theories is that human beings are not, for the most part, motivated by logic and reason but rather by sentiment.

Observing the Pareto Principle in Action

Here are some 80/20 rule applications:

  • Does 20 percent of your sales force produce 80 percent of revenues?
  • Do 20 percent of your products account for 80 percent of product sales?
  • Do 80 percent of your visitors see only 20 percent of your Web site pages?
  • Do 80 percent of delays arise from 20 percent of the possible causes of delay?
  • Do 80 percent of customer complaints arise from 20 percent of your products or services?

We all waste lots of time on trivial, repetitive tasks. That often means people are kept busy whether it is important or not, equipment is running whether needed or not, sales are made whether they are profitable or not.

Is the assertion that a small number of events produce the majority of results valid? It may not be a hard rule with a fixed ratio, but the observation has merit:

  • A handful of customers out of many produces the bulk of revenues.
  • A handful of products out of many items in a line produces the bulk of orders.
  • A handful of salespeople out of many produces the majority of new business.
  • A handful of scientists produces most research and development innovations.
  • Most grievances come from a few employees, and most absenteeism can be narrowed down to specific individuals.
  • Most accidents occur in clearly identifiable groups.
  • Truly poor (or great) performance is achieved by a few easily identifiable individuals.

We tend to ignore these realities in practice. We often give the best salespeople the most difficult accounts instead of focusing their talent in areas where they could generate extraordinary volumes. The most highly skilled workers are often given the toughest work, although concentrating their skills on trouble-free jobs would allow them to produce significantly more than less-skilled coworkers. The most talented people are often assigned to the most challenging problems that, even when resolved, generally contribute little additional revenue for the company.

Applying the Pareto Principle to Your E-Business

Here are three ways you can use the Pareto Principle.

1. Use best-seller lists.

Find the "vital few" and make them easy for your visitors to find.

Book bestseller lists, music top-40 charts, TV ratings, and Hollywood box-office receipts are not merely a barometer of popular culture. They're important marketing tools.

According to John Bear ("The #1 New York Times Bestseller"):

On Sunday, August 9, 1942, with no prior announcement and no fanfare, the New York Times published a list, 'The Best Selling Books, Here and Elsewhere.' Without exception, that list has appeared in every Sunday edition of the paper for 50 years.

A book that makes it to the top of the New York Times's bestseller list can proudly display "#1 New York Times Bestseller" on its book jacket. The publishers hope you will find yourself in a bookstore, see the book, and think, "If everyone else is reading it and buying it, I will, too." Think The Amazon.com 100 was created for some other reason?

2. Find out what to optimize on your Web site.

Often, when we review a client's WebTrends report, we spend a lot of time analyzing where and how traffic flows through the site. Guess what? About 80 percent of the traffic hits only 20 percent of the pages. We've found this to be true for both business-to-business (B2B) and business-to-consumer (B2C) sites (although it's not always true for content sites). Where do we focus our energy? Ideally, on those 20 percent of pages that are critical to the sales and buying processes and are required to maximize conversions. If users can't find those critical pages, we optimize the pages required to lead them there in the conversion process.

Take a look at Max-Effect.com, first the old site, then the redesigned one. When we analyzed how people bought yellow pages ad design from Max-Effect, we came to the conclusion they flowed through three pages: the home page, the samples page, then the contact page. So we spent time rewriting the copy on those pages and changing the samples page from a bunch of thumbnails to a couple of before-and-after ads with some copy. Bottom line: Max-Effect is generating four times more leads and closing more business with a third less traffic.

3. Fix or discontinue problematic products and services.

Stop wasting precious resources on products and services that drain energy, time, and money. Whatever the problem costs you today, when you redirect your efforts the return on investment will be much greater. Without negative baggage, you'll see real improvement in efficiency, morale, and productivity.

Why only three items, and not a top-10 list? You guessed it, the Pareto Principle. Again.

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ABOUT THE AUTHOR

Bryan Eisenberg

Bryan Eisenberg is co-founder and chief marketing officer (CMO) of IdealSpot. He is co-author of the Wall Street Journal, Amazon, BusinessWeek, and New York Times best-selling books Call to Action, Waiting For Your Cat to Bark?, and Always Be Testing, and Buyer Legends. Bryan is a keynote speaker and has keynoted conferences globally such as Gultaggen, Shop.org, Direct Marketing Association, MarketingSherpa, Econsultancy, Webcom, the Canadian Marketing Association, and others for the past 10 years. Bryan was named a winner of the Marketing Edge's Rising Stars Awards, recognized by eConsultancy members as one of the top 10 User Experience Gurus, selected as one of the inaugural iMedia Top 25 Marketers, and has been recognized as most influential in PPC, Social Selling, OmniChannel Retail. Bryan serves as an advisory board member of several venture capital backed companies such as Sightly, UserTesting, Monetate, ChatID, Nomi, and BazaarVoice. He works with his co-author and brother Jeffrey Eisenberg. You can find them at BryanEisenberg.com.

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