To contribute to the transportation community and our customer’s knowledge base, today we will be highlighting the “Pareto Principle”, and why this tool/methodology allows us to shift our focus on the areas that will have the most profound impact on our strategic goals and will yield the greatest results.
The Pareto Principle or “80/20 rule” is an extremely powerful tool, when properly applied, for growing any business. For instance, if you can figure out which 20% of your time produces 80% of your business’ results, you can spend more time on those activities and less time on others. Likewise, by identifying the characteristics of the top 20% of your customers (who represent 80% of your sales), you can find more customers like them and dramatically grow your sales and profits.
The most successful businesses utilize the Pareto Principle to ensure that all operations conducted within the business are contributing to the overall success of the business. Learn more about this methodology by more reading below.
What is the Pareto Principle?
The Pareto Principle, or 80/20 Rule as it is frequently called today, is a concept that was originally coined in 1906 by Italian economist Vilfredo Pareto. In studying the relationship between inputs and outcomes, he observed that 80% of the outcome is actually produced by the 20% input. He further realized that nearly every economic activity was actually subjected to this 80/20 distribution, noting that 80% of the Italian wealth of that time was controlled by as little as 20% of the population. This concept would come to be defined as the “Pareto Principle”.
The Pareto Principle and Business Strategy
The Pareto Principle is simple yet especially important. When it comes to business, the 80/20 rule is essential in relation to strategic planning. For example, in general, 20% of customers represent 80% of sales. And 20% of one’s time produces 80% of the results. And so on.
By understanding the principle, we can learn how to prioritize the tasks by the day, week, and month. This is something that every team leader should know if they wish to optimize their business to meet their strategic goals.
Adding the Pareto Principle to Your Strategy
Once you understand the basics behind the Pareto principle, you can easily use it to help your business. Here are the ways in which it can give your business a boost:
Productivity By utilizing the 80/20 rule, individual employees can prioritize their tasks so that they can focus on the critical 20% that will produce 80% of the results.
Quite a bit of what we focus on during a typical workday is fluff. Some tasks will yield a much better return than others. Pareto Principle teaches employees to that they should not be wasting so much of our time on trivial matters. It is time-consuming and it will not bring us enough value for the long-term goal.
This Pareto principle can also help you determine the reason why your business is unproductive. As a manager, you might use the rule to find the 20% of the reasons why your team is not being productive.
Regardless of the industry, it is a common occurrence in any business that roughly 20% of your salesmen produce 80% of your sales. Depending on your end goals, the Pareto Principle can be utilized to determine whether you need to focus your effort and resources on the 20% of staff that produce most of your sales to further improve their skills, or to focus on the 80% of other employees that are struggling to bring in any sales.
Also, the Pareto Principle indicates that a small percentage of your total amount of customers produce the majority of revenue. Similarly, only a handful of your products and/or services attract the most sales. As such, analyzing the leads and current customers you have can help you determine which ones have produced the most revenue in the past so that you can focus on pursuing only the most valuable leads. Further, discontinuing the products/services that don’t generate revenue and focusing on improving the ones that do can be ultimately more beneficial for the business.
The 80/20 rule suggests that a standard overview at your business’s website analytics will indicate that roughly 80% of traffic lands on 20% of your website pages. The 20% of pages that attract the most views are generally the critical pages that display content in relation to the purchasing process of your product or service. Using the Pareto Principle to analyze how traffic flows through your website will allow you to optimize it to ensure that it is straight forward for your viewers to access the critical pages of your website. This is not only proven to increase sales, but it also allows your business to grow at a faster rate with lower amounts of traffic.
The marketing efforts you conduct on your website can be analyzed to show that roughly 20% of your marketing strategies bring in 80% of the results. So, by building upon the marketing strategies that are proven to be effective you can draw more attention towards your business.
Just as the Pareto rule can tell you where things are going right, it can also determine where things are going badly. You may prioritize the problems, and see which issues enter the 20% that is likely to affect your business the most. The 80/30 not only allows you to identify potential problems, but it also enables you to take appropriate actions to resolve the most important issues concerning your business.
Using a Pareto chart, practitioners can quickly map out the frequency of identified issues and estimate impact. The higher the frequency, the greater the impact it will have on your business. The Pareto chart is an excellent way to pinpoint the issues affecting your sales, productivity, and overall success of the business.
Quality customer service and support is crucial. By using the Pareto principle to help improve customer support, you’ll know that 80% of the complaints are tied to about 20% of your products – which will further on allow you to tackle the improvement of that particular product.
Also, by utilizing the 80/20 rule you can identify which customer support members get the most complaints. This way, you may rearrange your staff so that your clients are also happy with the support that they get.
Overall, the Pareto principle teaches us how to identify and shift focus on the areas that will have the most profound impact on our strategic end goals, and what will yield the greatest results. It is particularly useful for businesses as it allows us to identify which aspects of our operations are not performing to their full potential, and thus makes it easier for us to focus on the issues that require the most urgent attention. The most successful businesses utilize the Pareto Principle to ensure that all operations conducted within the business are contributing to the overall strategic goals of the organization.