If the 80/20 split had applied only to Italian landowners in the early 20th century, we wouldn’t be talking about it today. But it turns out that the rule (the 80/20 rule, or Pareto Principle), is relevant to much more than olive groves in Umbria. It’s a basic expression of what happens in the daily life of a small business.
How many hours do you work in a typical day? 10, 12, 15? The Pareto Principle states that 80% of your best work will be done in the most effective 20% of those hours. In other words, if you’re a morning person, you’ll have the most effect on your start-up’s success in the first few hours of your working day. If nighttime gets your creative juices flowing, you’d be wise to leave that important presentation until after dinner.
And it isn’t just time to which the Pareto Principle applies. Pluck business-related examples of the 80/20 rule at random from the internet, and you get:
- 90% of Warren Buffet’s wealth is generated by only 10 investments
- 20% of your sales team is responsible for 80% of your revenue
- 20% of your customers are responsible for 80% of the sales you make
So, how do you apply it?
You need to start by identifying when you’re most productive during a working day. As noted above, some people are morning people. Some are night people. And while an entrepreneur’s working days are often defined by circumstance - when can you get uninterrupted hours to sit at the laptop? When are your investors likely to be available? - everyone has a most-productive period. Screenwriter Robert Rodriguez (Desperado, From Dusk til Dawn) does most of his work in the first 1.5 hours of his day, sitting up in bed and bashing out scripts on a laptop. Hey, if that’s what works for you, become a pyjama entrepreneur. As long as you can figure out when your working brain is at its most effective, you can leverage your best smarts to streamline real tasks in the life of your small business.
Take the to-do list. Every small business owner has a list of jobs that goes on for miles. The Pareto Principle teaches a nice trick for cutting that list down to just a few feet. Look at the tasks most likely to generate highly positive business outcomes - like sales, or networking opportunities, or high-visibility advertising - and focus on them. In other words, allot the magic 20% of high-productivity time to the relatively small amount of work that’s guaranteed to produce high outcome. There’s no point in preparing that presentation when your work brain is just about done for the day. And if you’ve got a deadline looming, the way to beat it is to smash the bulk of the grunt-work while your mental and physical energies are at their highest.
The Pareto Principle applies to any distribution of time/income/productivity figures. And that makes for a very interesting effect. Within your top 20%, there’s a top 20%. In other words: if 20% of your customers account for 80% of your sales, then 20% of the 20% account for 80% of the 80%. In real terms, this means your top 4% of customers generates 64% of your income.
There’s a good and a bad side to this. On the good side, you can use the Pareto Principle to pare down your to-do lists and target your most effective working hours to your most important jobs. You can also segment your existing consumer base into its most profitable percentages, which - with the right application of social channels and analytics - may let you target more customers just like them. And you can reliably assign the highest priority business tasks in your day, week, or month to the ultra-high 4% of your time, when your brain is able to bring in 64% of your total results.
On the other side of the Pareto Principle, though, there’s a warning. It’s tempting to focus solely on the big 20% (or 4%, if you’re going to keep reducing the rule to find the highest possible return on your effort), at the expense of the remaining 80%. But here’s the thing. That 80% still generates some work, and some revenue. Reducing the principle down to distil your most effective and profitable time can generate great results. But ignoring the less-productive times in your working day, or cutting out the customers who only bring in 20% of your revenue, is a bad idea.
Focus on the good stuff, but don’t leave any profit behind. And do the most crucial tasks first, but don’t neglect to catch up on invoices or clean out your email.
The Pareto Principle is a big productivity hack for the entrepreneur who needs to parcel out her time in meaningful ways. If you’re daunted by the multitude of tasks required to set up a small business, it’s also a great way to break down your journey into achievable chunks. Sit down (during your most productive time of day, of course), write a list of everything you need to do, and assess which elements are the most critical to your start-up’s success. With a little preparation, a big dream, and a list created using the Pareto Principle, you can go a long way.