Jan 20 2014, 9:24am CST | by Forbes
The Pareto Principle is very simple, yet very important. It is named after Italian economist Vilfredo Pareto, who, in 1906, found that 80% of the land in Italy was owned by 20% of the population.
What was most important about Pareto’s finding was that this 80/20 distribution occurs extremely frequently. For example, in general, 20% of your customers represent 80% of your sales. And 20% of your time produces 80% of your results. And so on.
The Pareto Principle, or “80/20 Rule” as it is frequently called today, is an incredible tool for growing your business. For instance, if you can figure out which 20% of your time produces 80% of your business’ results, you can spend more time on those activities and less time on others. Likewise, by identifying the characteristics of the top 20% of your customers (who represent 80% of your sales), you can find more customers like them and dramatically grow your sales and profits.
Now while the Pareto Principle or 80/20 Rule has been used by savvy business owners and executives for years, a recent and unique interpretation of the principle has taken its importance and power to a whole new level. I learned about this innovative interpretation in Perry Marshall’s incredible new book, “80/20 Sales and Marketing.”
Here’s how Perry Marshall has taken the Pareto Principle to the next level. He found that the Pareto Principle is exponential! Let me explain. We already know that 20% of your customers represent 80% of your revenues. What Marshall found is that, within that initial 20%, the 80/20 rule also exists. Meaning that the top 20% of the top 20% of your customers (or the top 4% overall) represent 64% of your sales (calculated as 80% times 80%).
Now you have a distribution in which the top 4% of your customers account for 64% of your sales. So you can find more customers like them. And importantly, the Pareto Principle scales to the third power, and fourth power, and so on when the numbers are great enough.
Importantly Perry Marshall’s “80/20 Sales and Marketing” succinctly explains the exponential power of the Pareto Principle, and then focuses on ways to apply it to your business to quickly grow sales and profits. For example, he teaches his “rack the shotgun” technique for quickly identifying potential customers who are ‘top 20%-ers’. He explains how to use the principle to get customers to call you (and never have to cold call again). He shows how to use the 80/20 rule to hire the absolute best talent. And perhaps most importantly, he explains how to use the rule to generate the maximum value and profits from your customers.
The Pareto Principle or 80/20 rule is an extremely powerful tool, when properly applied, for growing any business. The key is knowing how and when to apply it, and leveraging its exponential properties. Perry Marshall does an outstanding job in his book of providing clear examples and action steps for businesses to reap great profits. Perhaps most interestingly, Marshall is currently selling “80/20 Sales and Marketing” for only 1 penny on his website. As the master user of the Pareto Principle, I’m assuming he’s using this unique technique to identify the top 20% of the top 20% of business owners and executives. That’s powerful.
Source: Forbes Business
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