The Pareto Principle – 80/20 Rule for Entrepreneurs
Understanding the Pareto principle, or the 80/20 rule as its commonly known, can be a little tricky for someone who has just come across it. Some may even confuse it with Pareto efficiency, an economic phenomenon.
The two ideas share the same name and are connected indeed, but it’s better if you saw them as two different concepts for the sake of simplicity. The Pareto principle takes from the idea of Essentialism, or we could say it’s the other way around. Nonetheless, both lines of thought converge on one thing:
“Channel your time and energy to the vital few instead of the trivial many.”
What is the 80/20 Rule?
As Richard Koch pens in his book, The 80/20 Principle,
“The 80/20 Principle tells us that in any population, some things are likely to be much more important than others. A good benchmark or hypothesis is that 80 per cent of results or outputs flow from 20 per cent of causes, and sometimes from a much smaller proportion of powerful forces.”
Before we elaborate more on what this means for a business, let’s dig into some history to understand the origin of this concept.
It can be said that the idea was first introduced by an Italian economist, Vilfredo Pareto and it was not exactly in the form it is understood today. In 1901, Pareto discovered that approximately 80% of the wealth in developed countries was owned by 20% of the population.
Later, Pareto applied the similar idea that a seemingly minor 20% of causes is always responsible for the major 80% of consequences. Across all areas of life, from lifestyle to business, it was established that the 20% we channel our time and efforts into yields 80% of the happiness and satisfaction in life.
For instance, 20% of your investments might yield 80% of your returns. 20% of your favourite hobbies might consume 80% of your time. Or, as Pareto put it, 20% of the population may own 80% of a nation’s wealth. These are just three examples of how the Pareto principle applies to every aspect of life. But what does it mean for the aspiring entrepreneur?
Why Do Business Owners Need to Follow the 80/20 Rule?
The average entrepreneur tends to be too involved in too many aspects of their business. And the more ambitious the entrepreneur, the greater the chances of them spending a lot of time on trivial tasks rather than concentrating on what matters the most.
When running little errands for your business takes up more time than what you’re actually meant to do, know that you’re on the way of the non-essentialist. In other words, you’re devoting all your time and energy to the trivial 80% that bring 20% of the results.
Having an eye and ear, sometimes a hand, in every department of your business may give you the ability to be more strategic and agile as a firm. But don’t forget that you only have two eyes, ears and hands. You can only, but, manage a limited number of affairs efficiently.
As an entrepreneur, you have a unique set of skills. There’s something that you really excel at and possibly, there’s no one else you know that can do it better than you. To make the greatest progress in the shortest period of time, you must ensure that all, or at least, most of your time goes into working on what you’re best at!
If, for instance, you run a clothing store and you specialise in sourcing the best quality fabrics for sale, this is what needs your time and efforts the most. And if you’re spending most of your time trying to manage your store’s website, build a digital marketing campaign or manage the accounts spreadsheets, you’re at loss!
The 20% that yields 80% of the results for your business is your ability to buy the cheapest products to sell so you can make better profits. You’re advised to not waste your potential on the trivial many. Better yet, take your business to the next level by doing what you specialise in and outsourcing the rest.
The Relationship between Essentialism and the 80/20 Rule
If you’ve read our post on Essentialism, you might be able to see that the 80/20 rule says almost the same thing, but with a different name and a different way of telling. In fact, the 80/20 rule is in essence, an Essentialist phenomenon.
Essentialism, by definition, is focusing on doing the right things rather than doing more things. The author of the book, Essentialism: The Disciplined Pursuit of Less, writes:
“(Essentialism) It doesn’t mean just doing less for the sake of less either. It is about making the wisest possible investment of your time and energy in order to operate at our highest point of contribution by doing only what is essential.”
This is exactly what the 80/20 rule says, just differently and with some numbers and percentages added for a more precise feeling. By now, you’d know how Essentialism and the Pareto principle are two sides of the same coin.
Putting the 80/20 Rule in Action
Knowing about the 80/20 rule alone doesn’t help. For yourself and your business to be better off, you need to learn how to employ it as well. The 80/20 rule can prove to be one of the most amazing productivity boosts you and your business have got lately.
1. Concentrating on the Vital 20%
For starters, you need to identify the vital 20% for you and your business. For some, determining the most essential things they must do as an entrepreneur comes from right off top of their head. However, some business owners might need to sit down and evaluate what matters the most for them, or what falls into the vital 20% bracket.
For the sake of simplicity, let’s call the tasks or different parts of the business ‘items’. The items that generate the majority of the revenue or profits for your business qualify to be in the vital 20%. Similarly, whatever you specialise in as the business owner qualifies to be in that bracket. Once, you’ve identified the vital few for your enterprise, it’s time to stop losing sleep over the trivial many and start concentrating on what matters.
Start looking at things on a day-to-day basis. How many hours did you spend working on the vital 20% for your business? Once the 80/20 rule is in place, you should see yourself working on the vital 20% for at least 90% of your work time.
2. What to do with the Trivial 80%?
80% is a large proportion. And for most businesses, surviving without the trivial 80% is not possible. The Pareto rule does not urge you to scrap all those dealing right away, no. All you need to do is reduce the time you allocate to miscellaneous tasks to the bare minimum so you can focus on what matters.
While Essentialism takes a hardline route and advises that an Essentialist must cut off everything non-essential, the Pareto Principle takes a milder route. You do not have to abandon the 80% that brings in 20% of the results. Instead, you need to work smart and find better ways to continue them without compromising the vital few.
3. Diversify Management
Management, admin tasks, miscellaneous items are the major constituents of the trivial 80%. When a business is striving and growing at an amazing rate, the trivial many grow exponentially. An entrepreneur knows that with a high growth rate of a company, the many aspects they have to overlook increase with a higher rate.
This marks one of the most crucial times in a company’s journey. The decision you take here as an entrepreneur can either make or break your business. When your business is growing, you may start to devote a lot more time to management and other miscellaneous tasks rather than leading the company from the front.
Always ensure that most of your time is going into the vital 20%. But what about all the tasks that must be done to move forward?
It’s simple. If a task does not fall into the vital 20% for you, it will be for someone else who’s delegated to carry out that task.
This is where EZE comes in. Agile teams like EZE provide efficient, flexible, and professional assistance for your admin tasks so you can unleash your full potential and lead your business from the front. The Virtual Admin Assistance team can handle the most time-consuming ways in an efficient and adept manner so you can push your business ahead at full throttle!
The Pareto principle is not a dry rulebook to go by for businesses. Much like Essentialism, it’s a way of life and can be applied in every aspect from sales to personal relationships. It’s a way of thinking.
Give it a try. You surely won’t regret it.
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