Wednesday, 30 May 2012

80-20 Pareto Principle for more profit

80-20 Pareto Principle for more profit: by Jason Li 2012 ©

What is the 80-20 Pareto Principle and what’s this got to do with business. It is based on an idea by the Italian economist Pareto and has been quoted and written about in many text books. Added to this, many modern writers and business people have also used the 80-20 rule to help their business. For anyone new to this then please read on. For those of you who are already familiar, I hope I can bring some new ideas which make the 80-20 law principle improve your business.

Main idea of the Pareto Analysis

To explain Pareto’s law in a nutshell: the 80-20 principle is where 80% of your results come from 20% of your efforts. You could also interpret this as: 80% of your profits come from 20% of your customers or 80% of your wasted time is with 20% of bad customers/profits/admin jobs.

There is a small core in all sorts of categories where that core 20% affects the most results. It is a reoccurring theme. With this in mind, the principle can help you improve with your profits; less wasted time, have a more productive business, and can even improve your life. (See Wikipedia)


So how can you analyse and improve your business with the 80-20 rule? Let’s take some examples.

Referrals – who do you get referrals from? Which source gives you the most referrals, and which are the least? Why? How do you find more people providing referrals like the source who provide a lot of your referrals?

High profit customers – select the top 20% and work out who are these? What’s their profile? How did they know your business? What is it that makes them use your product and service? Why did they use you and not a competitor? Where can you do to get more of the same type of customers?

Bad customers – select the worse 20% and work out who are these? What are their profiles? How much time/cost do they impact on your business? What are the effects on your business if you did not service the worst clients? Can you use the energy/costs saved to find more profitable customers?

Which non profitable admin job takes up a lot of your time during the week? What can you do instead that is profitable in the same time? If you paid another person or paid for technology to do this none profitable task, would you improve the business if you could use the time instead to do profitable tasks?

Now these are questions which you should work through. I urge you to sit down with a pad and go through each question and take your time to review your business. If you are serious about making more profit, a life of less stress, possibly less working hours and free time to spend more of your profit, then you must do the above exercise properly to the best of your ability.

Imagine if a good customer who spends a lot of money with you had a problem and you had to spend time to fix it. And it would take you an hour to do it. You would do it. Now think of your bank balance as your business’s best customer (it really is). You would make sure your bank balance is very happy by doing a thorough review of your business with the above questions and see where you can make it better to get good results. If you don’t, then your bank balance might just disappear. By using the Pareto Principle over the next few weeks, you will see results that will make you feel much richer, more free and happier.

Major improvement

I have read much Brian Tracey material who is a major student and trainer of sales and goal setting. He suggests that we should find the one thing that will improve your sales skills and work on it. Then work on the next.

In terms of selling for me, it was an opening statement to get the owner or director of a business engaged enough to talk about the product or service I was offering. Then it became asking questions to know about their business and how to help with their problems. After that it was dealing with objections.

As I analysed which skill set needed the biggest improvement, and then worked getting better at them, so did my results as I improved. How can you do this for your selling skills, your marketing results or your business overall?

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