The 80/20 Principle
If you have been in business for a while, you have probably heard about Pareto’s Law, also known as the 80/20 Principle. This law describes a measurable phenomenon that has applications in many fields. Basically, the law states that out of two sets of data, there will often exist a relationship whereby approximately 80% of the results of the dependent variable will be attributable to approximately 20% of the causes of the independent variable. Maybe you say to this, “Wha???,” a typical response when someone goes into too much detail about variables and statistics. Some, who recognize that any questions will result in an even more thorough (not to mention boring) mathematical explanation, will opt to give a knowing nod and say something like, “oh yeah, I remember that” before changing the subject.
Let’s face it, even if you understand it, you probably don’t want to spend a lot of time discussing it. So, rather than diving into a stimulating lecture about regression analysis, let’s get to the point that matters: The 80/20 Principle has been applied to marketing and sales, two components of business near and dear to any business person’s heart.
The 80/20 Principle states that if you take the time to measure, you will likely determine that around 20% of your marketing efforts generate around 80% of your marketing results. You will also find that around 20% of your customers generate around 80% of your profits. This means that if we take the time and perhaps spend the money, we can focus our efforts in a way that saves us time, makes us money and helps us attract and retain the most profitable customers. Now we’re talking.
If 20% of our marketing efforts are vital and 80% are trivial, it seems worth the time, effort and perhaps some money to figure out what comprises that 20% and refocus our marketing dollars where it counts the most. And if 20% of our customers are highly profitable and 80% are far less profitable, what can we do to make those top 20% so happy they’ll never want to leave? So let’s get on it…but wait… What do we really know about those customers? Just how do we determine the difference between vital and trivial? Do we have all the data we need? If not, how do we get it? Better yet, do we have the technology to organize and compare the right data sets once we get our hands on it? And do you, in your hectic business world, really have the time to lock yourself in your office for two days to answer these questions, ignoring the phone and perhaps some of your most profitable customers to see who those most profitable customers are? Probably not.
I know business owners who are so busy that they don’t even have time to interview a person that would take on some of the work in which they are buried! You know, it really isn’t worth your valuable time because you need to attend to your business. On the other hand, it would make our day to help you find the answers to those questions…
Keesha Davis
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