Some of you might have heard of the 80/20 rule. Some might not. Don’t worry, we will go through what the rule is and how you can apply that to your business.
What is the 80/20 rule
In a nutshell, the 80/20 rule means that 80% of the results come from 20% of the work. This in a business field might mean that 80% of the income you get from your business comes from 20% of the work you put in. The remaining 20% of the income comes from the 80% of the work you do.
By cutting that 80% off, you could reduce your work significantly, without losing that much of your income. By focusing your energy and resources towards that remaining 20%, you might get a higher income with less work overall.
The 80/20 rule can be applied nearly anywhere. It can sometimes be even more drastic; for example 90/10 or 95/5. Let’s take going to a gym as an example. By going to the gym once a week, you will improve a lot compared to not going to the gym at all.
By going to the gym two or three times per week, you would not get as much of an increase, as the one time per week does. If you go 7 times per week, the results you get per one time greatly decrease compared to going just once per week. Now, let’s talk about how you can apply this same method to your business and work.
How to apply the 80/20 rule to your customers
The 80/20 rule can sometimes be applied to your customers directly.
If your business is in a business-to-business space, you can list your customers in Excel or another place where you can compare the customers. Let’s say you have 100 different customers. 20 of those bring in 80% of the revenue for your business, but each customer will take evenly time to manage.
By cutting off 80 or even the bottom 50% of the customers, your sales would only decrease by 10 to 20% while the work your customers require would drop to 50 or 20% of what it was before.
This is not always the case. Sometimes, your customers are evenly diversified, and they each are somewhat equal. If this is the case, you have a good diversification among your customers.
Another example if your business is in the business-to-consumer field. If you have a wide selection of customers and you sell electronics, for example. You are currently marketing your service to all kinds of people, but you notice that 80% of the returned orders come from a certain type of people.
That might be old people, for example, who don’t know how to use trendy new items. You might want to hold off from marketing to that segment, since they only bring in one tenth of the sales, but are accountable for 80% of the returned orders. This is just an example.
Always do good research before laying off any customers. If you have customers that are not bringing in that much revenue yet. Look long term, that might change. However, sometimes it is a good way to improve your businesses efficiency by focusing your resources on the best customers.
How to apply 80/20 rule to your expenses
The 80/20 rule can be applied to your businesses expenses as well, at least in some level. There might be some fixed raw material costs that take up the major portion of your expenses. However, among the not necessary expenses there might be some, that are expensive but only bring little to no value to your company.
The rule can be applied to your businesses marketing, for example. List down the expenses of your marketing budget. Then you should try to find out, how many customers each of those is bringing in and you can see, how much each way of marketing costs per one customer brought in.
Some expenses cannot be lowered, but there can be others, that have a low impact on your business but take a high portion of the budget on that field. That might be different kinds of subscriptions, marketing, or equipment. Every business is unique, and always do good research before making any major changes to the working business model.
The 80/20 rule is very efficient way of looking things. Not just in the field of business, but it can be used in almost every situation. This post was more about the impact it can have on your business, but if interested, I highly recommend taking a closer look at it.
There are several videos on YouTube about it as well as book/books written about it or including it. I have found the 80/20 rule to be very helpful in my education, business as well as my personal life.
Other business-related topics can be found here.
Hopefully this was helpful to you, have a nice day.