Three Business Lessons from the 80/20 Rule

We love any useful rule of thumb, but this is one of the best in the world. It's called the Pareto Principle, though you might have heard it called by a different name: the 80/20 Rule.

The 80/20 Rule is pretty simple: for many events, 80% of the effects will stem from 20% of the causes, with a little wiggle room on the exact numbers. The original example (and Principle's namesake) is Vilfredo Pareto, who observed in his time that 80% of the land in Italy was owned by 20% of the population. So it should come as no surprise that both businesspeople and economists have taken interest in Pareto's pattern. And now, you can too!

Three critical applications of the 80/20 Rule for business:

Most business will come from a small group of customers

You should, of course, put your best foot forward for every customer. Having said that: your 20-percenters are the people for whom it matters most to your business.

This doesn't just mean you answer their tickets first, or more generously (though it might also mean that). It means that you should consider giving this group of people some thought and attention of their own. Two examples:

You are much freer to initiate conversations within the 20% group, since these people are brand-fanatical at best and consistent customers at the very least. Don't abuse them by fishing for direct sales; do feel free to reach out directly (and personally) for a “trustworthy” opinion.

The upper 20% is the ideal group for some kind of “velvet rope” like a loyalty program, subscription service, private social community, or other premium offer. Not only does this present new options for monetizing those customers, but it can also provide tremendous value to them—and it can draw out new enthusiasm for those who never knew they were among your best customers (yes, you have customers like that).

Most issues will come from a small group of customers. In case it's not obvious, there's not usually much overlap between this group and the above—though, tellingly, there's still some overlap.

So let's say a word about each of the two sub-groups here:
The Plebs with Issues. We're all friends here, so let's be blunt: some customers don't pay you enough for the pains in the ass they cause you. Customer service should be polite 99.999% of the time—for good form in public, if nothing else—but if it reassures you to know this, it remains your right to fire customers. Especially the ones who don't buy anything.

The VIPs with Issues. In our experience, these people tend to be more “needy” than “unpleasant.” Still, if you welcome them with a good attitude, you'll notice that their comments are more valuable, and not just in customer-retention terms; these customers are better at spotting and highlighting real problems, and their ideas and suggestions are likelier to be worth something. If not… hey, at least they're spending money.

Most of the opportunity available to your business is clustered in a small number of places

For any real business (where scarcity is a daily reality), the most efficient way to improve is to attack the worst 20% of your problems and the most efficient way to grow is to attack the best 20% of your opportunities. This tends to be true no matter how you define either one for yourself. Fortunately, in the digital sphere where we do business, so many of the opportunities are some version of “pressing a combination of buttons.” We just need the courage to try things, the wisdom to learn which buttons, and the strength to sometimes ask for help.

(Visited 2 times, 1 visits today)
Close
Menu