Businesses across the world are implementing Pareto Principle to optimize their product innovation and marketing efforts. This principle is helping brands grow at an incredibly faster rate. This article helps you understand the basics of this principle and how to use it in your business.
Pareto Principle: Where does it come from?
In 1896, Italian economist Vilfredo Pareto made an important observation that defined how businesses are reshaping their strategies across the world now.
He observed that approximately “80% of the land in Italy was owned by 20%” of its population. Then he expanded his study on the wealth distribution in other countries, only to prove his initial observation. Hence, this is also called “the law of the vital few”.
Based on his observations, management consultant Joseph Juran developed the 80/20 Principle.
The 80/20 Principle, also known as the Pareto Principle, states that “roughly 80% of consequences come from 20% of causes”.
Soon, different industries began to study their fields to realize its widespread use.
- Personal Productivity: 20% of what you do on any day gives you 80% of positive results.
- Raising funds: 20% of the donors contribute 80% of the total.
- In computing: Software expert and author Lowell Arthur said “20% of the code has 80% of the errors. (Find them, fix them!)”
- Sports: About 80% of wins are produced by 20% of the players.
- Many video rental shops reported in 1988 that 80% of revenue came from 20% of videotapes.
- Restaurants: 80% of profit comes from 20% of the menu items.
- Content Marketing: Top 20% of content on your website gets 80% of the total visits.
- The concept was observed in nature as well. For example, 80% of the birds that were seen belonged to 20% of the species that were seen.
- Finally, let’s see how it showed up in Business: 80% of your offerings are bought by 20% of your customers OR 80% of complaints are raised by 20% of your customers.
Further, if you check your marketing strategy, you’ll find that 80% of positive outcomes are out of 20% of your marketing efforts.
Why is the 80/20 rule important for your business?
One of the biggest problems with businesses and entrepreneurs is that they try to do everything at once.
Like trying to create multiple products. Or using all social media channels for marketing at a time.
Look at the big companies that grew exponentially in recent times: Google (Search), Facebook (Social Media) and Amazon (Ecommerce). They all started with and built one core product. Even today, they are their core products even if they’ve branched out.
If you have observed, trying to do everything made many companies go bankrupt.
Even after decades of dominance, Yahoo! Struggled to compete with Google. In the last stages, it couldn’t decide whether it was a tech company or a media company. Yahoo! bought Tumblr for $1.1 billion and within 4-5 years, Yahoo! Itself was sold for $4.5 billion to Verizon. Yahoo failed because it couldn’t find its ONE magic product.
This happens with both start-ups and well-established companies. The start-ups try to build many things at the same time and well-established companies invest in multiple ventures without measuring their resources and income flow.
That’s why applying the 80/20 principle to a business is crucial. It helps you focus your business on what matters the most.
How to apply the 80/20 rule in your marketing:
The first step is to study your marketing expenditure and see if 80/20 is happening.
Look at which 20% of your marketing strategy is bringing you 80% results. And then focus on that 20% and reduce the efforts on the other 80%.
Now I’m not saying that the other 80% is to be completely eliminated. Because it contributes too.
For example, consider that 80% of your digital marketing budget is going towards social media and 20% towards your email marketing.
If 80% of your sales are happening through 20% of your digital marketing (or email), it doesn’t mean you should remove your social media strategy.
It means: First, put more effort into email marketing.
Secondly, study your 80% social media strategy. Maybe you’re trying to promote your brand on a social media channel that’s not fit for your business. Or maybe not at the current stage.
Before going further, let’s dissect 20/80 further and make it 20/60/20. In this, the top 20% is the most profitable and the bottom 20% is the least profitable.
Now, isn’t it easy to pause or eliminate the bottom 20% which is the least profitable? And divert your resources (both human and capital) into what’s giving you 80% revenue?
To give you another example, 20% of your customers are making 80% of purchases from you. The top 20% has your loyal and repeat customers. That’s where you should optimize your business. Soon, this will have a cascading effect on your entire business.