Pareto Principle for Small Business
The 80/20 Rule For Small Business Contractor
I want to talk about a useful analysis that I use in my remodeling business, it’s called the 80/20 rule.
If you’ve studied business or economics, you’re probably familiar with the Pareto Principle. Pareto was born in Italy in 1848 and went on to become an important philosopher and economist.
Legend has it, he noticed that 20% of the pea plants in his garden yielded 80% of the pea pods. This observation caused him to think about uneven distribution. Pareto thought about wealth and discovered that 80% of the land in Italy was owned by just 20% of the population. He investigated different industries and found that 80% of production typically came from just 20% of the companies. This generalization became the known as the Pareto Principle, and also Pareto’s 80/20 rule.
What is 80/20?
The 80/20 Rule means that in any situation, 80% of results will come from just 20% of the action.
The 80/20 rule observes that most things have an unequal distribution and while it is not always an exact 80/20 ratio, this imbalance is often seen in many areas of business:
- 80% of our revenues are generated by 20% of our customers.
- 80% of our complaints come from 20% of our customers.
- 80% of our quality issues occur with 20% of our products.
How You Can Use 80/20?
As a business owner, I use 80/20 to truly understand which projects are most important.
What are the most important goals of my organization, and which specific tasks do I need to focus on to align with those goals. The 80/20 rule, also helps me identify your best (and highest-paying) clients. Which allows me to focus on those money makers and strengthen my long-term relationships with them.
It’s important to remember that there are only so many minutes in an hour, hours in a day, and days in a week. We can use the 80/20 Rule to better manage our time and focus on the things on our task list that really make a difference.
- 20% of workers contribute 80% of results: Focus on rewarding these employees
- 20% of customers contribute 80% of revenue: Focus on satisfying these customers.
- Focus on the few goals or activities that are most critical to your success.
Misusing the Pareto Principle Can Be A Mistake
If you misapply this tool, you can make critical mistakes. For example:
You should not focus on just the 20 percent of top performers on your team at the expense of the other 80 percent. You are still accountable for increasing the number of top performers, as well as assessing and potentially eliminating poor performers
80/20 Rule Bottom Line
It is priceless when applied to task or goal lists. Use it liberally, but don’t accept it as an absolute, or you are likely to misstep.
Looking at our own productivity from the 80/20 lens,” you can cut the 80% of our tasks or projects that are unimportant or don’t contribute to our end goals.
So, what 20% of your work results in 80% of your outcome? I’ll let you think on that one – see you on the next contractor business article.