20% of companies’ products represent 80% of their sales. 80% of pollution originates from 20% of all factories. 20% of employees are responsible for 80% of a business’s results. The “80/20 rule” is formally known as the Pareto Principle, named after the founding sociologist Vilfredo de Pareto. This rule can be summarized as follows:
80% of outcomes result from 20% of inputs.
How does this rule take shape for small business owners?
Customers: The 80/20 rule can be used to identify your best customers. Generally speaking, 20% of your customers represent 80% of your sales. Knowing this, you will want to identify the characteristics of the best 20% of your customers. Remember, companies cannot be all things to all people; the more you understand and market to your core customer, the more sales you can generate. Creating a customer persona of this customer helps you to identify and understand this person on a deeper level.
Inventory: Again, we can see the 80/20 rule at work when we consider the inventory of a store. There are always bestselling items or services in every store; more options are not always better. Sometimes having too many options causes customer confusion and indecision. By taking a close look at the products you offer, you can identify the products that are taking up space and contributing very little to your bottom line. Eliminating these products frees up space for the products that are your bestsellers.
Using the 80/20 tool effectively can help grow your business. The University of Mary Washington Small Business Development Center (UMW SBDC) helps local businesses evaluate their business to determine effective strategies for growing and scaling their business. If you are a client, please contact your consultant to schedule an appointment. If you are not already a client, you may register for free, confidential business assistance by completing a Request for Consulting form on our website, umw.edu/sbdc.