80/20 principle also known as Pareto Principle was analyzed and deduced by Vilfredo Pareto in 1905 and it basically states that 80% of the results come from 20% of the efforts.
A few examples of this principle are:
80% of the wealth is owned by only 20% of the population.
80% of your results are an outcome of 20% of your efforts.
You wear just 20% of the clothes 80% of the time.
80% of the sales are due to 20% of the total customer base.
20% of the trees were responsible for 80% of the apples harvested.
These are just a few of the examples that represent a great inefficiency all around us but at the same time represent a great scope for improvement.
We have to understand that the ratio might not always be 80:20, in some cases it can be by 65:35 and in some cases 90:10. But there will always be a ratio present.
It all boils down to a conclusion that A Few Things Are Important, Most Are Not.
How to use the 80:20 principle to grow your business?
A company/ individual can easily use this principle by not trying to do all the things at the same time and being efficient. After a period of time, it gets evident that most of the results are being driven by a limited number of efforts/ factors.
Let’s take an example of an apparel store:
Say after analyzing the data we could conclude that 70% of the revenue is generated by 30% of the products in an apparel store.
After seeing such results the organization can decide to take appropriate actions like optimizing the ratio. This can be done by doubling down on the efforts on the products that are selling and reducing the inventory of the products that are not selling.
Though we have to keep in mind that the non-tangible factors of sale like the variety, placement, positioning, etc are also some of the factors that influence the sale revenue. So it isn’t just a pure number game, one has to keep experimenting to optimize the ratio in order to boost the business.
In conclusion for businesses, here’s how you can allocate your resources for more efficiency:
Allocate more resources/time at the fruitful performing 20%.
Try to make underperforming 80% more efficient by tweaking the unproductive work
Optimizing the 80/20 ratio would be a very time-consuming and long process but the results can be monumental for your business when done correctly and efficiently. Understanding the fact that “A Few Things Are Important, Most Are Not”.