Pareto’s Law, aka The 80/20 Principle
Pareto’s Law is named after Italian economist Vilfredo Pareto, who lived from 1848 to 1923. Pareto observed that 80% of the land in Italy was owned by 20% of the population, this was in 1906. He also observed that 20% of the pea pods in his garden contained 80% of the peas. He used a mathematical formula to demonstrate a roughly uneven, but predictable distribution of income.
Pareto’s Law can be summarized as follows: 80% of the outputs result from 20% of the inputs. Another way to phrase some practical situations:
80% of your complaints come from 20% of your customers
80% of your profits come from 20% of your customers
80% of your sales come from 20% of your products
80% of your profits come from 20% of the time you invest
This list goes on and on, and the ratio differs and like 90/10 or 95/5, but the minimum is usually 80/20.
One of my main principles is to work location independent whenever I want, and not to waste 80% of my time on fruitless efforts. As a systems engineer in the IT, it’s my goal to achieve maximum results with a minimum of effort.
Do you ever feel overwhelmed or unproductive? If you don’t know what to do first, maybe it’s necessary to analyse your business (or life fort hat matter) and make some drastic changes.
You can apply Pareto’s Law in your business or your personal life. If you want to enjoy the benefits of this Law, you’ll have to analyse your business. For example: You have 10 customers and you spend most of your time fixing complaints of 2 customers that only provide 10% of your income. It would be wise to talk to those customers, that
a) they shouldn’t complain that much and be more cooperative, or
b) lose the client and invest the time that becomes available on your existing clients that are profitable.
It’s important to check every aspect of your business, like your customers, your suppliers and your staff. Ask yourself the following questions to determine what to eliminate, and what strong points to focus on:
Which 20% of sources cause 80% of the problems?
Which 20% of sources cause 80% of desired outcome?
Analyse everything, apply these questions on every process. Try to find inefficiencies and eliminate them, try to double the efforts that deliver profits. The choices can be difficult, but you have to be honest with yourself and decide what or who to lose.
Be sure to check your customers, a lot of time goes to customers who cause you 80% of the problems You’ll have to be selective with your customers, more of them doesn’t automatically mean more income. You can suffice with the customers who deliver 80% of your income, and lose the rest. If you can spend more time on your clients, they will feel more appreciated and become better customers, by ordering more or maybe placing larger orders.
To be honest, when I notice that a supplier is running the extra mile, Ill reward them knowingly or unknowingly by being a better customer! Think about it.
by Ard-Jan Verhage
AJ has a site about running a location independent business using online tools and the latest gadgets.
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