The Pareto Principle or 80-20 Rule is Not What You Think

pareto principle

I remember nodding in agreement when I first heard a business expert emphatically state that 80% of a company’s results come from 20% of their resources. Somehow, it seemed to make sense. And the 80/20 ratio had a name: the Pareto Principle. Some even call it the 80/2 Rule. A principle and a rule. Must be valid, right?

Wrong. The point of the Pareto principle is to recognize that most things in life are not distributed evenly. It is not to create a hard and fast rule, it is to help you avoid hard and fast rules!

Do this exercise with your team

Pick a measurable goal such as “We will increase revenue by 15% by the end of 12 months.”

Then ask everyone to throw out ideas about how you could reach this goal.

You’ll get ideas like these:

  • More marketing
  • More sales training
  • Raise prices
  • Offer discounts and sales
  • Roll out a new product or service and pour everything into selling it to everyone.
  • Acquire a similar company and their customers
  • Win a huge contract with one big customer
  • Spend heavily on social media marketing
  • Attend an industry trade show to increase prospects
  • Get speaking engagements in front of decision makers

If you were to apply the 80/20 rule, you’d try to figure out which two of these ideas could generate 80% of your revenue in 12 months. You’d invest heavily in the two you choose. You’d set benchmarks for them and select the best members of your company to execute them. Everyone in the company would be focused on these two choices more than any other work.

Are you starting to feel uncomfortable as you imagine this scenario playing out in your company? So large an investment in only two of these options! Your feelings are correct, investing heavily in 2 out of 10 options in a high-risk strategy.

The Trivers Consulting Group Principle: 80/50

During my research about the Pareto Principle I was reminded that the total percentages do not have to add up to 100. The take away is that it is the concept of a ratio that reflects uneven distribution. (In other words, not 1:1.)

The way we look at it:

  • Companies should have many ideas in the fire and should choose as many of them as they can execute reasonably well.
  • Continue to monitor results and stop the investment in any that don’t seem to be paying off, sooner rather than later.
  • Bring in other options, rather than intensifying the concentration of investment in a smaller number of options.

I write in my book Tinker: How Smart Business Owners Develop Creative Idea for True Growth that owners and executives should trust their hunches—which are ideas that bubble up from experience and are not necessarily backed by existing data or firm logic at the start. Then create an experiment to test the hunch. It’s during the test that you collect raw data. Following the end of the test, analyze the data and decide to implement or cancel.

When a company owner or executive trusts their hunches and experiments, they are increasing the number of possibilities for tactics that contribute to the desired results.

Our 80/50 principle reflects the idea results are distributed unevenly.The more ideas you execute reasonably well, the more likely it is that they will bring in that 80% of revenue you desire. The more broadly you experiment and the more options you try, the better your chances of reaching your revenue goals.

Get Started with 80/50

To help owners and executives apply our 80/50 principle and get started using it to their advantage, we offer an 80/50 Brainstorming Kickoff. This is 90-120 minutes that will culminate with an execution plan to implement several of your ideas in service to a specific, near term goal. Your company can do the implementation yourself or discuss with us some support and guidance to keep you on track.

Are you a smart business owner with lots of ideas who would benefit from the support of Trivers Consulting Group, a company that is celebrating our 20th Anniversary precisely because we’ve lived the 80/50 principle.? Call 703-801-0345or email susan@susantrivers.com.

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