The Pareto Principle, named after an Italian economist-sociologist, Alfredo Pareto, states that the significant items in a given group normally constitute a relatively small portion of the total items in the group.
By Harold Taylor
The ratio that holds true in most cases is roughly 80:20. For example, 80 percent of your results are obtained by 20 percent of the things you do, 80 percent of the total inventory cost is tied up by 20 percent of the items in inventory, and so on. Thus the principle is frequently referred to as the 80/20 Rule.
This 80/20 Rule was mentioned during a discussion on time management at a past members’ meeting of the Sussex and District Chamber of Commerce. In any business, this relationship applies in numerous situations – although the actual percentages may vary.
80 percent of advertising results come from 20 percent of your ads. 80 percent of customer complaints are concerning the same 20 percent of your products or services. 20 percent of your networking time generates 80 percent of your referrals. 80 percent of the useful information on the Internet is obtained from 20 percent of the sites.
Twenty percent of the sales force generates 80 percent of the sales volume. Twenty percent of your telephone callers consume 80 percent of your telephone time. Eighty percent of your interruptions are caused by 20 percent of your co-workers. Eighty percent of the value in a meeting is from 20 percent of the agenda items. Twenty percent of your activities accounts for 80 percent of the value of all your activities.
Knowing this relationship does nothing to increase business. But taking action will. See where this principle applies in your business and then see what you can do to take advantage of these facts. If you are in the retail business, for example, the following are a few examples.
If 80 percent of the traffic takes place during 20 percent of the day, identify this time period and declare it peak sales time. Have additional staff during this time if necessary. Make sure everyone devotes as much time as possible to customer service and selling. Tell staff not to work on paperwork, stock shelves etc. during this peak period. They can do the maintenance and administration tasks during off-peak times.
If 80 percent of the sales seem to be generated by 20 percent of the staff, train all employees on the basics of up-selling and customer service as well as product knowledge. Make sure the staff members who interact well with customers are not hidden away in the back room.
If about 80 percent of the shoplifting occurs in 20 percent of the available hours, security should be concentrated during these peak hours. And you should be well staffed. There is a correlation between shoplifting and customer service so interaction with customers should be greatest during this time period as well.
And since regular customers buy more, make more referrals and are less price-sensitive, it would pay to get to know your customers. It would also be wise to see how you can get more traffic into the store and keep them there longer, since sales varies with the length of time spent in the store. You could also attempt to convert some of those 80 percent browsers into customers.
The Pareto Principle could apply to the names on your mailing list, the source of shrinkage, customer complaints, returns, and staff lateness as well as other areas. When you see that ratio, take action.
The larger the company, the greater the impact the 80-20 Rule has on the bottom line. The 80-20 Rule suggests that one-fifth of a company’s revenues account for four-fifths of its cash and profits.
For example, if you have sales of $500,000 and profits of $25,000, your profit is 5% of sales. Nothing to brag about. But if the 80-20 Rule applies, $100,000 of the sales produces $20,000 of the profit (20% return on sales) and $400,000 of the sales produces $5,000 of the profit (1.25% return on sales). The top fifth of the business is 16 times more profitable than the rest of the business. If you organize differently, you possibly could make the higher profit on the profitable parts of the business and discontinue the rest.
Oh yes – and 80% of the attendees at all Chamber meetings are from the same 20% of the membership. If you join any group or association, remember that most of the value of membership is in participation.
Harold L Taylor, owner of Taylorintime.com, is a member of the Sussex & District Chamber of Commerce and a columnist with the Kings County Record, tj.news/kingscountyrecord.