Contributing author Joey Slaughter is the owner of Blue Ridge Transport, LLC. A Ringgold, VA based carrier. Joey started his company in 2010 after serving time as an unhappy employee with a local trucking company. The time spent there was not fun but, in hindsight, was a turning point that propelled Joey into the wonderful world of being an entrepreneur. Please visit JoeySlaughter.net for more insightful blogging.
20% of people use 80% of medical resources. 20% of computer bugs cause 80% of viruses. 20% of workplace hazards cause 80% of injuries. 20% of people commit 80% of the crimes. These aren’t exact, but I think you would agree there is a principle here. The 80-20 rule, also known as the Pareto principle, states that approximately 80% of the effects come from 20% of the causes. Business-management consultant Joseph Juran suggested the principle and named it after Italian economist Vilfredo Pareto who observed in 1906 that 80% of the land in Italy was owned by 20% of the population. This uneven but predictable distribution of wealth in society also applied outside of economics as stated above. In fact, it’s found almost everywhere. Pareto observed that 20% of the pea pods in his garden contained 80% of the peas.
It is a common rule in business that 80% of your sales come from 20% of your clients. In his book “The 4 Hour Workweek” Tim Ferriss uses this principle to concentrate on the important and discard what’s not. He examines his business through the lense of these two questions:
- Which 20% of sources are causing 80% of my problems and unhappiness?
- Which 20% of sources are resulting in 80% of my desired outcomes and happiness?
After a detailed analysis, Tim discovered that out of 120 wholesale customers, only 5 were bringing in 95% of the revenue. He was spending 98% of his time chasing down the other 5% of revenue! He decided to ditch the 115 customers and examine the 5 big customers and note what is similar. He then went out and tried to duplicate them by finding other potential customers that shared the similarities.
In conclusion, think about this principle in regards to your business or even personal life. Analyze what 20% of sources (good or bad) that you need to either improve or eliminate in order to get the desired results. This type of management multiplies our effort by minimizing wasteful time.