How useful would it be for you to know exactly where your time was best spent? How would it improve your productivity if you could quickly and reliably determine which customers were most lucrative for your business, and which ones were costing far more than they were worth holding on to? Fortunately, the ability to determine exactly that was established more than 100 years ago.
Back at the dawn of the 20th century, an Italian economist realized that he could mathematically calculate the fact that 20% of Italian citizens owned about 80% of the nation’s wealth. This equation proved to be valuable in analyzing far more than just the wealth distribution in Renaissance Revival-era Italy. In fact, the so-called “Pareto Principle” has been (and continues to be) used as an effective method of measuring distributions of wealth, effort, sales productivity, and countless other applications. This is because there is a fundamental truth — what some might call a philosophy — associated with the 80/20 equation discovered by Vilfredo Pareto.
What is the fundamental philosophy of Pareto?
At it’s core, the philosophy of the Pareto Analysis is based on an understanding of the fact that a relatively small percentage of input is responsible for a significant amount of the output. More specifically, that 80% of output can be attributed to 20% of input. This, of course, works when analyzing wealth distribution (as it was originally used by Pareto), but it also works in a number of other applications as well.
Perhaps the most compelling application — at least in our entrepreneurial and capitalistic society — is use of the Pareto Analysis when assessing productivity. More specifically, an entrepreneur, or salesperson, can usually attribute about 80% of their profit (or sales volume) to about 20% of customers. On the other hand, about 20% of customers often take up about 80% of the bandwidth available to an entrepreneur or a sales team.
The Pareto Analysis can be applied to any number of things:
- Customers – both the time demands and their profitability
- Daily tasks – where your time is spent productively and unproductively
- Wealth – where the majority of your wealth is coming from, and where the majority of your expenses are derived
- Anything else you can think of!
Using Pareto Analysis to become more productive
In order to use Pareto Analysis effectively, you must first be willing to accept a couple of facts: The first is the fact that some of your clients or customers may not be worth your time. Even if they are paying you what seems to be a valuable amount, the reality is that the opportunity costs associated with highly-demanding clients may be preventing you from gaining more worthwhile (in the long term) clients. The second thing you must be willing to accept is all work is not equal.
Not all clients are worth keeping. Many businesses, particularly those that are just starting out, are reluctant to turn down any work that comes their way. After all, money is money, right?
In fact, taking on a client that continues to be unprofitable or is demanding a disproportionate amount of your company’s time can ultimately prevent you from developing new, more profitable business elsewhere. You can use the Pareto Analysis to determine which clients are taking a disproportionate amount of your time (so you can try to phase them out) while also helping identify which clients are producing the vast majority of your revenue (so you can nurture and grow those clients as well).
Some of the work you do isn’t worth the effort. The bottom line is that you simply cannot do everything, and you certainly cannot do everything well. As such, you should use the Pareto Analysis to determine which specific aspects of your day are producing the majority of benefit, then work to eliminate or delegate/outsource anything that does not fall into that category.
Try using the Pareto Analysis yourself, and see if you can make your day more productive by eliminating the time consuming, unproductive tasks and focusing on the high-yield tasks.