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The Pareto Principle, 80/20 Rule, What is it?

Pareto Principle – use it to dramatically grow your business 

 

The Pareto Principle or the 80/20 rule states that 80% of the effects come from 20% of the causes.  It was named after an Italian economist, Vilfredo Pareto for his work in the 1890’s when he found that 80% of the land in Italy was held by 20% of the population. 

 

It has also been shown that this generally holds true in business.  When applied to business, this paradox can have a huge impact as it singles out the important factors to focus on and allows us to achieve more by doing less. 

 

If you examine your product sales, you’ll be able to identify the top 20% of products which are likely to account for 80% of your profit.  These figures are in round terms.  In reality the figures may be 70/30 split or another combination however the general principle remains.   

 

Once you’ve determined your top selling products this will allow you to focus your time and energy on selling more of these products and services to maximisthe greatest impact on your bottom line.   

 

You’ll also discover the advantages of economies of scale.  By reducing the number of products and services, you’ll remove internal complexities and cost.  You’ll be able to streamline and deliver your products and services more efficiently and improve customer experience. 

 

The 80/20 rule can also be applied to other areas of your business: 

 

  • 20% of your customers may account for 80% of your sales.  Identifying your top 20% can allow you to nurture the relationship and ensure that they remain customers.   
  • 20% of your marketing may account for 80% of your sales.  This will allow you to focus your time and money on advertising that achieves the best conversion rate. 
  • 20% of your sales force may account for 80% of your sales.  This will allow you to remunerate the effective employees and work with those that are less effective. 

 

 

 

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