How to leverage data analysis to find and eliminate inefficiencies and make more money with the least effort.
What is 80/20?
The 80/20 principle (Pareto?s Law) is something interesting, almost magical. It?s a principle discovered by the Italian economist Vilfredo Pareto in 1906, who noted that 80% of Italy?s land was owned by 20% of the people. He became somewhat obsessed with this ratio, seeing it in everything.
You?ve probably heard about the 80/20 Principle before but do you REALLY understand its true power to transform your sales and marketing efforts?
Nowadays, it is one of the great secrets of highly effective people and businesses.
It also can be 85 / 20 or 66 / 10. In other words, the majority of the results (or outputs) are almost always caused by only a few inputs.
So how can you apply this to your business? Whether you have an e-commerce product-based business or a service-based business such as an agency or a consultancy firm:
80% of all your results in business come from 20% of your efforts
Let?s say you have 30 customers or products. You?re tempted to treat them all the same while they?re not the same at all. Odds are, roughly 80% of your sales come from about 20% of your clients or products. Focus your time and money on those 20% and you will spectacularly increase your revenue.
Or did you realize that 80% of support tickets or complaints come from 20% of your customers? And 80% of those 80% customer complaints can be eliminated by correcting only 20% of the causes.
If you hire 10 salespeople, two will generate 80% of the sales and the other eight will generate only 20% of the sales.
That means that person for person, the two are SIXTEEN TIMES as effective as the eight. Yep, a good salesperson is not just 50% better, they are 16X better. Here is a huge leverage of the 80/20: if you pay attention ? you?ll gain a lot, but will much lose if you don?t.
You can use this principle to generate the most money with the least effort
80/20 is the best-kept business secret
80/20 has been applied by many successful businesses and organizations.
Apple used a slightly modified version of 80/20 while developing the Apple Newton Message Pad, an electronic personal organizer in 1993. They found that 0.1% of a person?s vocabulary was sufficient to do 50% of the things you want to do with a small handheld computer.
Most software spends 80% of its time executing only 20% of the available instructions. RISC processors optimize the performance of that 20 % and keep the chip size and costs down by eliminating the other 80%.
The question is how to find and apply those key 20% in your business?
Image Credit: ellehell
For example, by doing 80/20 analysis of sales and profits in different categories of business:
1. by product or product group/type
Which 20% of your products are responsible for 80% of your sales and/or profits?
Focus your marketing and sales efforts on these products.
For example, when I realized that most of my sales come from one type of my products (custom B2B designs vs custom B2C vs retail), I focused all my efforts and time on custom designs. Goldy.LA was born ? custom metallic temporary tattoos as a promotional product for businesses.
Custom Metallic Temporary Tattoos ? Goldy.LA
Out of 24 different sizes of custom temporary tattoos that we offer, only 10 (42%) are chosen 90% of the time and one really stands out in terms of profitability. That?s 90/42 rule. So instead of offering all possible sizes, we can simplify the ordering process by offering a few most-popular ones.
Pareto?s Principle ? Sales by Product Type
You can look further by comparing % of sales vs % of profits. This applies to businesses where products, services or projects require unequal customer support and if some take a lot of salespeople?s time relative to their value, for example, and others take very little.
Look at the sales over the last period, month or year and work out the profitability after allocating all costs, then filter by Return on Sales (Income/Sales * 100 %) from the most profitable to the least.
Image Credit: 80/20 Principle by Richard Koch
Then create a second table with the percentage of the product?s sales vs overall sales + cumulative %. And the same for the profits. Now you can get some great insights from the data.
Image Credit: 80/20 Principle by Richard Koch
In the example above 30% of sales of A, B, C and D account for almost 67% of profits. You can increase prices for the products E and F and review the viability of products G and H. But most importantly, allocate most efforts of your sales team to focus on doubling sales of Products A, B, and C.
This will make the sales go up by 20%, but the profits would rise more than 50%!
If you?re not yet utilizing this principle in your business ? you?re leaving money on the table.
2. by customer or customer group/type
- Which 20% of your repeat buyers are responsible for 80% of the repeat purchases? Follow up with them to re-connect.
- Which 20% of your customers cause 80% of the complaints and headaches? Consider eliminating them.
- Which customers spent the most $? 80% of the overall revenue comes from 20% of your customers or clients. Focus on nurturing the relationship with these buyers.
- Which states or countries do 80% of your sales come from? Focus most of your marketing efforts on these.
3. by any other split that is relevant to your business
- Identify 20% of root problems
This shows that almost 80% of support tickets are caused by general inquiry and product issues, which is almost 20% of the total tickets in the categories. By creating a strategy to target these two vulnerable areas, the number of new tickets can be greatly reduced.
Other metrics to look at could be:
- Which 20% of employees attribute to 80% of company sales?
- Which ads have the greatest effect and return on investment?
- What are your most visited pages on your website? 80% of persuasion happens on 20% of your web pages.
- Which 20% of the tasks on your to-do list account for 80% of your productivity?
The hidden power of 80/20
Almost nobody realizes that 80/20 is a fractal ? an endlessly repeating pattern: 80/20.
Full power of 80/20 comes from finding 80/20 within 80/20 within 80/20.
For example, 80% of support tickets or complaints come from 20% of your customers. And 80% of those 80% of customer complaints can be eliminated by correcting only 20% of the causes.
If you ignore the bottom 80%, 80/20 will still be true of the top 20% that?s left. That means 64% of your results come from 4%. Then you can 80/20 the top 4% and guess what, 50% of your results come from 1% of what you do.
For example, if you want to see LA Lakers, you can get into a single game for as little as $19, season tickets range from $1000 for mediocre seats to $10,000 for the best seats. Sports teams get 50 of their revenue from 1% of their customers because their biggest fans can spend 16x the money.
This might seems like a class on statistics but pay attention. Here is one of the most powerful facts about business:
80/20 says that 4% of your customers will spend 4 times the money.
Also, 4% of your customers will spend 16 times the money.
Image Source: http://www.8020curve.com/
And it is scarily accurate.
Southwest Airlines is #167 in the Fortune 500, with $15.7 billion in sales. 80/20 is incredibly accurate and applies to literally a million different things. The tool is at www.8020curve.com.
When you use 80/20 this new way, it prompts you with incredibly powerful questions:
?If 100 people paid $3,000 for a voyage on a cruise ship, 80/20 predicts that 7 of them would pay $30,000 to scratch the same itch in a bigger way. What kind of exotic cruise would you need to organize to get those 7 to spend thirty grand?
The sky?s the limit. As Jay Abraham likes to say, ?How high is up??
- Do an 80/20 data analysis on your products, projects, salespeople, customers and marketing campaigns.
- Allocate more resources to the top 20% by moving time/resources away from the unproductive 80%. Do more of what?s working well.
- Address the under-performing 80%: Find ways to make the unproductive activities more productive or effective.
- 20% of your customers will spend 4X the money. Don?t leave that money on the table. Find what kind of product or service you can offer to these 20%.
Pareto?s law is a simple, yet very powerful tool. It can be applied to almost everything in business that you can count or measure. It?s the secret behind your business? success. Use it to maximize your return with the least effort.
I?m an entrepreneur with a data engineering background. Contact me if you need help with anything from the application?s database design to analyzing big data to get valuable business insights that will help you make and save money.