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Applying the Pareto Principle to Small Business

Management

Applying the Pareto Principle to Small Business

Applying the Pareto Principle to Small Business

Updated: Dec 23, 2019

The Pareto Principle is sort of depressing. That’s because according to the Pareto Principle, a majority of the work that you’ve done in your life doesn’t really matter. At least not by quantitative metrics. This depressing fact of life will likely bum you out at first, but it could lead you to dramatic revelations that have a life-transforming effect on the way you think, the way you work, the way you budget your time and how you spend and save money.

I’m a bit mopey to begin with, so whenever someone tells me that something is going to be depressing, my ears perk up, like, ‘Yeah, give it to me, Universe. I’m ready, you indifferent tyrant, you merciless bringer of existential humiliation.” Learning about the Pareto Principle turned out to be a bit of a curveball, and has helped me become a lot more effective with my effort, which turns out to be much more satisfying than indulging my ambient misery.

The principle is simple enough. 100 years ago, Italian economist Vilfredo Pareto studied a wide range of national market economies and found that the richest 20% of people controlled the majority of the country’s wealth, no matter which country he examined. Income disparity is no longer surprising, but Pareto’s findings carry implications that extend far beyond market economics.

What Pareto called a ‘predictable imbalance’ turns out to affect just about every system you can think to apply it to. The numbers fluctuate — the Pareto Principle is an observation, not a natural law— but for our purposes we’ll stick to the 80/20 frame of reference as that ratio pops up again and again. 20% of your content will generate 80% of your views. 20% of sales teams generate 80% of the revenue. 20% of customers are responsible for 80% of sales. 20% of users are responsible for 80% of use. 20% of an application’s code is responsible for 80% of the crashes. 20% of the people we manage cause 80% of our interruptions.

Many people make a not-fully thought out assumption that the results generated by their effort are the sum total of their cumulative effort, but that turns out to be wrong pretty much all of the time. That’s why this can be a depressing way to frame your life. If 20% of your effort generates 80% of your results, what the hell are you doing with the other 80% of your time?

Applying the Pareto principle is easy:

Next time you sit down to write a to do list, get down everything you need to do.

Now take each item in your list and write down either A, B or C to denote the task’s relative impact on your objective (A being most important, B being moderately important, C being less important).

Next, on a scale from 1 to 5, write down the number that indicates how much effort will be required to complete the task (1 being no effort, 5 being a lot of effort).

Your list should now look something like this:

  • Send out holiday party invites C 3
  • Send meeting notes to partners B 2
  • Order office supplies C 4
  • Write job posting B 5
  • Post sale update to Facebook C 1
  • Send out new product email blast A 3
  • Update training manual C 5
  • Arrange client lunch for next week A 1
  • Create sponsor presentation deck A 5
  • Email new leads A 1

Now you can tackle your to do list by starting with the most important, easiest to perform task. If you have two tasks of similar importance, you can pick the right one to fit the window of time you have available. Proceed through your list that way every day and your behavior will start to change. You will automatically prioritize important tasks and begin to understand how the weight of each of your efforts contributes to your overall results.

Your list should now look something like this:

  1. Arrange client lunch for next week
  2. Email new leads
  3. Send out new product email blast
  4. Send meeting notes to partners
  5. Create sponsor presentation deck
  6. Write job posting
  7. Post sale update to Facebook
  8. Send out holiday party invites
  9. Order office supplies
  10. Update training manual

By prioritizing your critical tasks and ordering them by the amount of time they will take to complete, you will guarantee that the things that keep your business running will always get done first.

You can apply this formula to your next budget or use it to assess your hiring needs. A large number of organizational problems are solvable with relatively limited effort, if you know how to organize them.

This is not a license to do anything half-assed. Sometimes we spend too much time on details when a general, top-level approach will more than meet the needs of our objective. On the other hand, sometimes details really matter. If the most important aspects of a surgery are performed in 20% of the time, you still need to finish the surgery. You can construct the critical elements of a building in 20% of the time it takes to build the whole thing, but no one will be able to move in until it’s finished and you’ve got blinds up on the windows.

The point is to reframe how you understand work. You should not go out and fire the bottom 80% of performers on your sales team, but you should figure out what the top 20% is doing and determine how you can integrate what makes them successful and use that as a basis for helping the others level up. You should not focus solely on pleasing the 20% of customers responsible for your sales (though you should focus on them first!), instead you should figure out what it is about their customer experience that makes them so valuable, and try to spread that to other customer segments.

Tags: Management

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