The UK's Liveliest Small Business Newsletter
Old archive | New site
|
|
Brick No49: The 80:20 rule & how to use it
By Matt Weston, Friday 12 March 2004 Over the last few weeks I've exposed several rule-of-thumbs as myths. Today I'd like to share with you a rule-of-thumb I swear by. The 80:20 rule (or the Pareto Principle as academics prefer to dub it) states that 80% of results comes from 20% of effort. Or – – 80% of your profits come from 20% of your products – 80% of your sales come from 20% of your customers – 80% of your problems come from 20% of your customers – 80% of your effectiveness comes from 20% of your time – 80% of a market will be dominated by 20% of companies in it – 80% of your time will be spent finishing the last 20% of a project How much Kylie, Britney et al contribute to UK Single sales In my early 20s I spent several years involved in the music industry. Only the top artists really matter when it comes to shifting units. Over the last 10 years, the UK has averaged about 1 million sales of singles a week. Over 100 singles are released a week, yet the top 10 accounts for about 750,000 of all record sales. So less than 10% of records released account for 75% of all sales. You could call that a 75:10 rule (the 80:20 rule isn't an exact science, it's a rule-of-thumb). In my local, The Shakespeare, roughly 80 percent of the beer is drunk by 20 percent of drinkers, whilst the newsagent across the road makes most of his money from 20% of his product lines (mainly newspapers, cigarettes, confectionary, dairy and alcohol). My football team, Leicester - I was born there, I can't help it - has relied on just 3 of its squad of 23 (13%) to come up with 68% of the goals this season. And about 90% of the feedback I've received over the last 6 months regarding business bricks has come from 15% of you. (Keep it coming, and if you haven't given me any feedback already, start today!) You get the gist. Whether it manifests itself as 75:10, 68:13, 90:15 or 80:20 the message is the same; results and efforts have a lopsided, almost counter-intuitive relationship. A few activities, products or customers always account for the large majority of results. And the 80:20 rule isn't just an observation. If that was the case, I wouldn't be wasting a brick on it. The 80:20 rule is a powerful business tool that you can use when thinking about your business, your products, and the way you manage your time. How a local bookseller found his niche with the 80:20 rule A second-hand bookshop on my high street used to buy and sell any and every classification of book. It had no focus, and as a result much of the proprietor's stock remained unsold for years, taking up valuable shelf space. So he changed tack. He worked out what kinds of books people were buying most, and what kinds of books were staying on the shelves. The 80:20 rule applied. He had thousands of books in over 50 categories. But of those 50 categories, less than 10 accounted for almost all of his sales. He started to specialise in sourcing those books that suited his market and stopped stocking those that didn't. Now stock moves much faster and his till rings far more often. His was a simple 3-stage approach: (1) Segment the books into categories (2) Match amount of stock held, by category, against the sales made (3) Focus on the most profitable 20% of categories Using the 80:20 rule on your business The bookshop proprietor used the 80:20 rule to analyse and rethink his product line. You can do the same with your product line, your customers, your marketing activities, your sales staff and your time. The 80:20 rule helps you group or segment customers, products or activities. The bookseller's strategy was to focus on his best performing products; to develop his own niche. He analysed his product line, and then used 80:20 thinking to develop a plan that could take his business forward. Your approach might be different. You might decide that you don't want to focus simply on your most profitable 20% of customers. You might instead focus on trying to convert your less profitable customers into more profitable customers. The strategy you take will depend on your business's key goals, the factors that determine the success of your business. The 80:20 rule isn't prescriptive. It simply helps you stand back and think about which of your products, customers, efforts and tasks really contribute to your profits and end goals. Remember to sign up: back to top |
|
|
Link to us | Privacy Policy | Disclaimer | ©2005 Business Bricks Ltd
Designed by Mint Digital