What is the Pareto Principle?
One of our favourite tools or principles to use when consulting small businesses is the Pareto principle. To explain briefly, Vilfredo Pareto was an Italian economist who deduced that 80% of outcomes or consequences are produced by 20% of efforts or causes. This is where the 80/20 rule that we commonly hear about was established. Let’s see how we used it to benefit a business in a real-world scenario.
Client Scenario: How was it applied for a small business
When consulting with a small business within the media industry we saw that this business had many streams of income. The streams of income included services ranging from photography, recording customer videos and building websites to mention a few.
The problem was out of these streams of income, the services that took up most of the time(photography) was resulting in lower-yielding income while the higher income services(website building) were not gaining traction and focus it needed due to the manpower and energy exerted on the smaller jobs.
The client had two problems:
- They didn’t know which income stream to prioritise and focus their efforts on
- They didn’t know how to prioritize tasks to focus on the right activities to give them the value for their time spent on them
How we used the Pareto Principle to solve the problem
1. Identify key revenue streams and time spent on them
Using the principle, our clients could identify income streams the time spent (actual hours) and revenue associated with each one.
For example, they could earn R15000 on producing a website that took up to five days to complete. Whilst on a typical photography job they could earn R5000 and spend two weeks on it with a lot more editing and revisions in producing the final product.
Now we not saying that the client had to scrap the photography jobs, but a big portion of their time was spent on marketing, promoting and doing the photography jobs which also took the most time to complete.
The exercise allowed them to step out of the business, take a look from the outside in and see what their current activities were yielding from a revenue and time perspective and the overall impact on their business.
2. Streamline Your focus
By identifying their higher revenue streams the client could streamline their focus and prioritise their tasks and marketing efforts around the two higher income-producing services. The website service listed above then made sense to pursue as it yielded more revenue in less time. This ensured that the eighty percent of preferred outcomes would be attained with the focus on the twenty percent of efforts.
3. Declutter and get clarity on where to exert your energy
Essentially the tool helped them to declutter what they were actually busy with within the business and provided clarity on what needed to be prioritized to be more productive with things that made a difference. In the world of a small business owner, this makes a lot of difference as we can get into the “I’m busy rut” and not actually being as efficient with our time with sometimes limited resources.
Our overall impression of the Pareto principle
The Pareto principle is a reliable and valid way of doing a check to ensure your business is on track with the correct activities that are helping to fulfil your vision. It can also be used for productivity by helping you to prioritize your daily tasks. Either way, it’s a simple principle that can yield great benefits.
The question is, are you using your best assets smartly and efficiently to get maximum revenue return for your business? What 20% of your efforts are driving the 80% of outcomes and what needs to change from a priority perspective to make sure you focused on the right efforts to get your business moving forward, faster? I’m sure by using this principle that you will get closer to achieving your goals sooner.