The Pareto Principle: How to Achieve More with Less In Your Business

If you are not trying hard enough but looking for ways to work smarter, then you are a failure. Working smarter is not just about finding new ways to do the same tasks faster; it also involves challenging yourself - learning new techniques, researching different approaches and staying up-to-date on industry best practices. 

Without these qualities, even the most innovative ideas won't produce tangible outcomes - making smart work pointless if not combined with hard work as well. So the Pareto Principle - let's just find out how we can apply the 80/20 rule to identify the most important tasks, streamline your workflows, and boost your productivity. It's just a concept that you can keep in mind but should not get caught up in it.

What is the Pareto Principle?

The Pareto Principle, also known as the 80/20 rule, is a concept in economics and business management that states that roughly 80% of effects come from 20% of causes. In other words, a small percentage of inputs or efforts often leads to a disproportionately large percentage of outcomes or results.

This principle was named after Italian economist Vilfredo Pareto, who observed in the early 20th century that 80% of the land in Italy was owned by 20% of the population. Later on, this principle was found to be applicable to many other areas, such as business, time management, and productivity.

For example, in a sales organization, the Pareto Principle might suggest that 80% of sales come from 20% of customers. In a manufacturing plant, 80% of defects may come from 20% of production processes. By identifying these key inputs or factors, businesses can focus their efforts on the areas that will have the greatest impact on their bottom line.

How Can The Pareto Principle Be Applied In Business?

Since it’s a way to think about achieving more with less, the Pareto Principle can be used in business to help you achieve more with less. It’s about focusing your efforts on the things that will have the biggest impact on your business goals. Here are some examples;

Sales

If you want to increase sales, 80% of your sales come from 20% of your customers. You can then focus your efforts on these valuable customers and try to attract more like them.

Time Management

If you spend 20% of your time on planning and 80% of your time on execution, you will likely see much better results than if you spend 80% of your time on planning and only 20% on execution.

Staff Management

If you want to improve efficiency in your company, 80% of the work is done by 20% of the employees. You can then focus on these productive employees and try to motivate others to match their output.

How You Can Use the Pareto Principle in Your Business

1. Identify the 20/80 Elements

Find out the 20% of activities that are responsible for 80% of your results. This could be things like;

• Generating new leads
• Closing sales
• Providing customer support, etc.

2. Focus on the 20

Focus on the 20% that is important and let go of the 80% that is not. If you have a budget, you can delegate or outsource the low-impact activities so you can spend your time and energy on these high-impact activities, i.e. what really matters.

3. Track Your Progress

Continuously monitor and adjust your activity mix to ensure you're always working on the most effective things. As your business grows and changes, so too will the activities that generate the most results.

Contradiction: The Quote by Abraham Lincoln

“If I had 9 hours to cut down a tree, I would spend 6 hours sharpening my axe.” [Abraham Lincoln]

This quote by Abraham Lincoln is cited as an example of the importance of preparation and planning. It emphasizes that taking the time to prepare and equip oneself properly can save time and effort in the long run.

It means that while the Pareto Principle tells you to use 20% of your time on planning, Lincoln said he would spend 66.6% of his time on planning. 

Don’t Rely On Stupid Principles

Lincoln said one thing and some Italian guy said another. Principles and theories are often developed based on research, experience, and observation, and they can certainly be used for guiding decision-making. Not all principles are universally applicable and they never work in every situation. They are only useful frameworks, that’s all. 

It is ultimately up to you to decide what they want to do and how you want to live their life. Don’t rely on stupid principles and do whatever you can. The results will prove the percentages for you.

Alternatives to the Pareto Principle

You wouldn’t be surprised to know that others have come up with almost exactly the same principle but with different ratios, such as;

• The 90/10 Rule (10% of your efforts with result in 90% of your whatever.)
• The 99/1 Rule (Only 1% of internet users actively create new content - so you should become one of the 1%)
• The 99/1 Rule (Success is 99% attitude, 1% aptitude - Zig Ziglar quote)
• The 98/2 Rule! (Success is 98% attitude, 2% aptitude)

The Law of Diminishing Returns

The law of diminishing (marginal) returns, states that as more units of a variable input are added to a fixed input, the marginal product of the variable input will eventually decrease.

You have a “fixed input” to start with, such as;

• Land
• Equipment

You put a certain additional input to make things work, such as;

• Labor
• Materials

The additional input may increase the production process, but as you keep adding more inputs, the additional output will decrease after a certain point. That’s because the fixed input becomes a bottleneck to the production process, limiting the amount of output that can be produced.

For example, you have a factory. Initially, as the number of workers in the factory increases, the output of products per worker may also increase. But adding more workers may lead to overcrowding in the factory, causing a decrease in efficiency and a decrease in the marginal product of each additional worker.

It suggests that there is an optimal level of inputs that can be used to maximize output and minimize costs. Beyond that optimal level, the costs of additional inputs may outweigh the benefits of additional output, leading to diminishing returns and reduced profitability.

How Can The Law of Diminishing Returns Be Applied In Your Business?

Understanding this concept may be able to help you optimize your operations and increase efficiency. Here are some ways in which the law of diminishing returns (LoDR) can be applied in business:

Resource Allocation: 

Businesses need to allocate their resources, including labor, capital, and materials, in a way that maximizes output. The LoDR suggests that there comes a point where adding more of a certain resource may not result in a proportionate increase in output. Thus, businesses need to determine the optimal level of resource input that will result in the highest level of output.

Pricing: 

The LoDR can also be applied to pricing strategies. Businesses need to set prices that are optimal for maximizing profits. However, there comes a point where increasing the price of a product or service will result in a decrease in demand and thus lower overall revenue. Thus, businesses need to find the sweet spot where pricing maximizes profits.

Marketing: 

Businesses need to allocate their marketing resources effectively to maximize their return on investment. However, the LoDR suggests that there comes a point where additional marketing efforts may not result in a proportionate increase in sales. Thus, businesses need to find the optimal level of marketing spend that maximizes their ROI.

Production: 

The LoDR can also be applied to production. Businesses need to determine the optimal level of production that maximizes their output while minimizing their costs. However, there comes a point where additional production may result in diminishing returns, and the costs of producing additional units may exceed the revenue generated by those units.

The Pareto Principle: Final Words

The Pareto Principle may be an effective method to increase productivity and achieve more with less. Now that you understand how it works, would you put it into practice in your own business? Or do you think it'd be a waste of time like I do and you'd rather get on with what you've got to do?