Introducing the Pareto Principle
Most people will be familiar with the Pareto Principle. It states that 80% of what you get out depends on 20% of what you put in. If you omit 80% of what you do, you still get back 80% from your business. The problem is knowing which 20% of your activities are the key ones.
A book that offers a helpful explanation of how the Pareto Principles applies to business is “80/20 Sales and Marketing: The Definitive Guide to Working Less and Making More”. Its author, Perry Marshall is a successful American marketing guru. The book explains the basics and offers links to the author’s website for some helpful marketing tools.
If this topic interests you, I recommend the book as a thorough introduction to the topic. Like many of these topics, you learn more by paying attention and experimenting in the real world. Here are a couple of insights based on the book.
Your Offer Portfolio
Let’s say you have several customers who are willing to purchase a product or service from you for £100. A few of these customers would be willing to spend more on your offers, perhaps £1000 or even £10000!
The Pareto Principle suggests that 20% may be willing to pay more, perhaps up to £1000. Maybe 20% of those customers (4% of the original) would pay £10000 for the right offer. The idea is you still make offers at £100 but add the more expensive offers to your portfolio.
If you can find customers who are willing to pay more, the chances are you will have less work to do to break even or make a profit.
Let’s say 100 people have bought your £100 package. Now you could argue that the figures imply 500 people would be willing to pay £10. These would give you an income of £5000, equivalent to 5 people accepting the £1000 offer.
But note, it may actually be easier to find the 5 willing to pay £1000 (or the maths suggest 20!) than the 500 willing to spend £10. Note the Pareto principle is statistical and so all figures are illustrative and real figures may be different but will support the principle.
You may need to have some low-end products to build a customer base but once you are established then the chances are with the right offers, a few people will pay higher prices.
Personal Development
If you have your own business the chances are you are trying to market something you are good at. Your most valuable work may be delivering some product or service. The Pareto Principle suggests you will be spending 20% of your time doing the thing you’re good at and the rest of the time doing all the other things that are necessary for your business.
Just imagine if you could spend 80% or more of your time doing the stuff you are good at. You would be able to focus on what sells and so focus on the 20% of your market that generates 80% of your income.
This is why businesses employ staff, people who can do the 80% of the necessary work, to allow the business owners to do what they do best. This 80% covers a range of activities. It isn’t just admin but may be things like financial management, marketing, etc. But it could also be housework.
One objection to this may be that it is exploiting others. So, long as you pay a fair wage, what you are doing is opening up opportunities for other people, which is what businesses exist to do.
As soon as you have consistent income, it is worth considering what can be delegated to others to free up time to do what you do best.
Pareto and the Local Economy
Pareto is not necessarily all good news and its implications for the local economy, are at first glance, bleak. Next Friday, I’ll explore the implications of Pareto for the local economy.
Have you used the Pareto Principle in your business and to what effect?