I’ve been showing businesses how to use the 80:20 rule for over 15 years now. Usually it’s when we’re looking at the spread of customers but in the last few weeks I’ve been thinking about how it can apply to other areas. Particularly as here at the F Word we’re trying to deliver on a very ambitious plan; I need to work out where it’s worth putting the effort into.
So what is the 80:20 rule?
You might know it as the Pareto rule. It means that roughly speaking 80% of your results come from 20% of your efforts. Now this can vary from 70:30 to 90:10 and anywhere in between but it’s been proven to apply to almost any area of business and life. If we can identify this 20% that gives us most of our results, we can work on minimising the “wasted” 80% of our time or effort that is delivering so little.
Customers
So when I use this looking at customers, we look at how few customers actually make up the bulk of your income. In most businesses I’ve worked with the relationship has been very close to 80:20, so 20% of the customers make up 80% of the income. Very often there’s a long list of customers that make up the remaining 80% including lots of small customers that don’t make much profit and take a lot of servicing. And have you noticed how the smallest customers can be the biggest pains? Just how much of your company staff time and resources go into looking after that bulk of customers who make up the smallest chunk of your turnover?
Get clear on where most of your revenue comes from and make sure those customers are making proper margins. I had an interesting conversation with a client yesterday about whether that meant we should ditch the bottom customers and we all agreed that would be dangerous without some real analysis of the impact!
Products
The principle works for products as well. Usually you have a small number of items that customers buy a lot, and possibly quite a few that sell relatively little. We can use this information to make sure we’re not tying up too much cash in stocking those products, and that we make good margins on the products we sell the most of.
So when I think about mum and dad’s business, I know from the weekly Z report that around 75% of their restaurant income comes from a few key best sellers, so we can focus on those products achieving the right margins.
Where does your time go?
If I could curb the amount of time I spend checking email and twitter I’m sure I could free up enough time to take over the world! I am so easily distracted!
In the last few weeks since my Big Week Out, I’ve been much more focussed on spending quality time on the important things, and quite frankly just stopped doing things that I either don’t like or don’t feel important. The world didn’t stop turning and guess what, we’re making good progress on the online courses and our video project.
Do more of what you love and what you’re great at
This might be easier said than done, and it does feel a bit indulgent at first. But if you spend time on things you’re really great at and love doing, you’ll do them better and chances are they’re the things that really drive your business.
Where does your business come from?
If you rely on incoming referrals, then I bet that most of them come from a few good sources? People who really like you and get you? If that’s case, then really focus on building brilliant relationships with those few and don’t waste time trying to be best mates with everyone.
What about your marketing? How much of your marketing spend and effort actually brings in the results, and how much time do you spend monitoring all the statistics (do we really care how many twitter followers we have?) Be clear on where 80% of the results come from and just focus on those.
And what about your team?
This one will probably drive you a bit nuts, but just take some time to look and think about what 20% of your team deliver most of your businesses results, and what 20% of their time makes the biggest difference. I’m convinced we’re all paying people to do some things that just don’t matter that much.
You don’t need to go and do anything radical, unless you want to of course, but you could just start to think about the 20% in different parts of your life that are really making the difference, and what might you just stop doing?
Important disclaimer! You should not stop looking at your finances; this definitely should sit in your important 20%!