Posted on 18 May, 2018 | 3 mins
The 80/20 rule was coined more than a century ago by Vilfredo Pareto—an Italian economist and engineer who worked out that 80% of his country’s economy at the time was driven by the wealthiest 20% of people.
However, “The Pareto Principle”, as the rule is also known, became useful in much more varied ways than economics.
It says that if you have 10 jobs to do, only two of them will be particularly valuable. Despite that, we’ll automatically focus more on the eight less-valuable tasks first.
The 80/20 rule also applies in different ways:
- That 20% of your customers take up 80% of your time
- That 20% of your products make up 80% of your revenue
- That 20% of your sales staff create 80% of your sales
- That 20% of your clients create 80% of your profitability
- That 20% of your plant or machinery delivers 80% of your output
- That 20% of your business’s data has 80% of the value.
You get the idea. Of course, it’s not always 80/20. You may find that three or four jobs bring the most value, or even that 1% of your products make 99% of revenue. But the principle stands: that people, staff and businesses as a whole will spend less time focussing on the “vital few” in favour of the “trivial many”.
This is an essential bit of self-analysis for any entrepreneur when setting their business KPIs—so thanks, Vilfredo.
How can you make it work for your business and your key performance indicators? We’re glad you asked.
How to do a simple 80/20 analysis
It starts by looking at how you currently work. Performing a “Pareto analysis” is nowhere near as daunting as it sounds on paper—or screen. You just have to know what data to measure.
You’ll need to measure both the 20% (the causes) and the 80% (the results), which you can then put into your “Pareto chart”. We’ve come up with an example below.
So, let’s say you want to measure your complaints (the cause) as a factor in why customers or clients churn (the result). You’ll want to start pulling a list of all the complaints you’ve had that led to a lost client. If you use customer apps for your business, like CRM software, you’ll likely have a store of this information on hand already.
You’ll then break down each cause as a percentage of all your complaints, and line them up from most common to least. As you tally up your complaints, the Pareto principle suggests that one or two stand out as the main "80%" of reasons why your clients leave, though you’re likely to be disproportionately active in addressing the less common causes.
You can do this with virtually any business metric—like reasons for poor cash flow, staff productivity or sales performance—making it a great tool for reassessing your focus areas and hitting your KPIs. Speaking of which…
How to use the 80/20 rule for KPIs
Your business apps should have all the information you need to create your own 80/20 analysis. Once these are set up, your data dashboard essentially becomes a KPI dashboard, where you can track your performance as you retarget your efforts on the “vital few” areas of improvement.
To look at another example of KPIs, you might be tasked with improving monthly sales. So:
- You pull data from your sales apps and find that indeed 20% of your products are insanely popular and are bringing in 80% of your revenue.
- You refocus your sales and marketing efforts on these products to get them in front of more people.
- You track your sales performance (or even lack of it) through your dashboard to see if you’re on target and within reach of your monthly sales KPI.
Should you notice that you’re not reaching the heights you expected, maybe your marketing efforts are skewed—focussing 80% of your budget on inefficient advertising, for instance. In which case, it’s time to do a Pareto analysis on your marketing channels.
It’s a novel way of reassessing your KPIs and boosting your business efficiency.
That being said, you might be so darn efficient that the 80/20 rule doesn't apply to you—and if so, we send our applause. But if nothing else, Italians have given us pizza, eyeglasses, the ice cream cone, aqueducts and the typewriter. It might be time to give Signor Pareto a chance to impress you, too.