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How the 80/20 Rule Can Change the Way You do Business

Posted by PCC Small Business Development Center on July 07, 2015

80/20-ruleSometime around the year 1906, the Italian engineer and economist Vilfredo Pareto is rumored to have been tending his garden, where he had the realization that 80% of the peas he harvested, came from only 20% of the pea pods. Curious to see if this pattern repeated itself in other systems, he went on to discover that 80% of the farmland in Italy was owned by 20% of the population.

Known as either the Pareto Principle, or the 80/20 rule, his observation holds true in business as well as agriculture. In many facets of business, a small minority of causes are responsible for the majority of outcomes. Understanding how the 80/20 rule affects your business can help you focus your time on doing those things which are most important to your businesses success. Below, we’ve outlined some tips on how you can get started.

What Is Your 20%?

Take a hard look at your business. Out of everything you do, which activities generate 80% of your revenue. Is it reaching out to new clients? Is it renewing contracts with existing clients? Your answer will vary depending on what business you are in, but identifying the activities that generate 80% of your revenue is the first step to unlocking your business’s true potential. If you are unsure, setup a method to begin tracking your efforts, so you can find out what is working.

$10/hr Tasks vs. $100/hr Tasks

Perry Marshall warns in Entrepreneur that too many small business waste their time on what he calls $10/hr tasks, when they could be doing things that generate $100/hr or more in revenue. You need to delegate, or even eliminate altogether those tasks that don’t have a direct impact on the most-important 20% of your business.

To do this, spend a week taking notes on how much time you are spending on essential vs. nonessential tasks, with the goal of of reducing your time spent on nonessential tasks to 1.5 hours a day or less. Consider hiring a personal assistant that you can delegate to those tasks which can’t be eliminated. Paying them $15/hour to file paperwork and pick up office supplies is money well spent when it frees you up to focus on jobs that bring in $150/hr in revenue.  

Try the 80/20 rule in your business. Who are the 20% of your customers that generate 80% of your revenue? What are the marketing efforts that bring in the most leads? Knowing the activities or clients that have the biggest impact on your business will help you keep laser-focused in growing your business.  

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The Oregon Small Business Development Center Portland Community College has  helped thousands of businesses over the past 30 years. We combine one-on-one  advising with programs taught by business experts, giving our clients the  resources they need to grow their businesses. We’ve celebrated many successes  with our clients. We'd love to celebrate your success. 

Topics: Professional Development, Small Business, Growing a Business

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