How the Pareto Principle can help you, your business and business plan.
The 80/20 rule
As business owners and generally as humans we battle against our beliefs and cognitive biases on a constant basis. Proportionality bias implies that big events have big causes but in reality the smallest imperfection in glass can cause it to shatter. One of our main jobs as business coaches is to help you challenge your beliefs. If you want to grow and evolve, so do your beliefs. The Pareto Principle or 80/20 rule conflicts with proportionality bias in the sense that it suggest 80% of results come from just 20% of actions.
We can sometimes assume 1 lead = 1 lead but we all know that leads differ vastly in quality. Richard Koch in his book ‘The 80/20 Principle’ calls this the “50/50 fallacy”. Richard argues in favour of the Pareto Principle and that 80% of all life’s rewards come from just 20% of the efforts.
A bit of 80-20 Rule Background
“The 80-20 rule—also known as the Pareto principle and applied in Pareto analysis—was first used in macroeconomics to describe the distribution of wealth in Italy in the early 20th century. It was introduced in 1906 by Italian economist Vilfredo Pareto, best known for the concepts of Pareto efficiency.
Pareto noticed that 20% of the pea pods in his garden were responsible for 80% of the peas. Pareto expanded this principle to macroeconomics by showing that 80% of the wealth in Italy was owned by 20% of the population.”
So why is that important and why does it help me as a Trades Business Owner?
The 80/20 rule presents a way to challenge and evaluate your systems. In a statistical fashion, you can break down and evaluate each stage of your system to discover which elements are providing 80% (or more) of the results and re-focus efforts.
This is a methodical way of working smarter. It isn’t about working 80% less it’s about driving more resources in to the 20% that works.
What’s more – this process isn’t just a business principle; you can apply it across your life as a whole. It is an aperture of introspection and analysis through which to view the world.
“Not only is happiness not money, it is not even like money.”
– Richard Koch
Questions to ask yourself
- Which sources bring in the top 20% value-based leads to my business?
- Who are the top 20% of my audience that I wish to reach with this ad?
- Should I focus more budget/resources on my 20% most frequent customers?
- Am I using my time to do things I have always wanted to do?
If you find a lot of your self initiated questions revolve around marketing, you can find more information about common marketing mistakes : https://chriswharram.actioncoach.co.uk/2020/08/03/20-top-mistakes-trades-make-marketing/
Building on the Pareto Principle from a marketing perspective your marketing should always be focussed on your best customers.
Steps to using Pareto (80/20) to problem solve and plan
1) Identify problem
Break down the problem as granularly as possible. Isolate each problem and rank them.
2) List factors
Essentially building on step 1, list all the factors which contribute to the problem and rank them. How you decide to rank them could be based on KPIs, statistics, feedback or any number of metrics specific to each issue.
3) Tackle contributing factors
Once you have a list of all the contributing factors ranked you will generally find the solution to solving the largest segment of your problem in the first 1 or 2 factors. These top ranked factors will generate the greatest gains for the effort or resources employed.
Succeeding with Pareto
If working hard was the measure of success, everyone would be successful.
The Pareto principle and Richard Koch suggest that effort is not the key to success. Instead focus on using your resources and time to achieve the most effective methods of generating success. If those areas lead you to be more effective than others then you will simply develop a competitive advantage based on efficiency.
Avoid glorifying hard work, instead glorify effective work.
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