Entrepreneur Solo

Entrepreneurs and The Pareto Principle

For those of you who don’t know the Pareto Principle states that 80% of output comes from 20% of input. It is also called the 80/20 rule as a result. The principle is often referred to in business as you will get 80% of profits from just 20% of your clients. The idea being that you try to replicate that 20% of clients and sack the 80% who don’t contribute much to profit and cause probably 80% of the problems. Tim Ferriss in his seminal book the Four Hour Workweek states that in his company it was more like a 95%/5% split.

The question is whether the Pareto Principle is always relevant? Obviously I can see it in many areas, for example my wardrobe. My clothes are roughly split that way with my favourite shirts, trousers and jumpers getting most of the wear, I won’t bore you with the underwear and socks stats. I can see it in my food buying. About 20% of the things are replenished each week and the larder and fridge are full of the other 80% which make up specials or occasional meals. I see it in my work online where the results in terms of outputs come from some highly specialised work I do and the rest can easily be outsourced and bit by bit this is getting done. However there is one area I cannot see it clearly and that is in another aspect of my business, the real estate client.

The initial contact from a potential client is always an exciting and interesting time but there is no way to recognise the 20% who will supply the 80% results initially, or perhaps you know better? One enquiry is essentially the same as another. The time spent with a client taking them to properties, advising them on loans, making offers and negotiating with owners is essentially replicated with all potential buyers and you never really know until you get to the end of the process which ones will be buying. Can you see how the Pareto Principle can be worked into this equation?

Nevertheless, since I worked out the basics of this principle my life as an entrepreneur in Spain has become markedly easier. No longer do I do all of the little things which may need doing but really don’t contribute to the bottom line. I know that there are certain actions that are much more important to my business. That is where I concentrate and even though I cannot distinguish yet between the serious buyer and the potential tyre kicker my view is simple, despite being a tyre kicker “the client” is part of the 20% that bring money into the business. They may not make up the 20% of those 20%, ie they may be in the 80% that do not add to the bottom line but if you treat a client well and give a service to be envied there is a great likelihood that eventually there will be a reward for all of that effort in the form of friends or family doing business.

What is your experience of the Pareto Principle. Leave us a comment below. And remember this can be done using the following method to get a nice link to your site name@website.com. All comments are moderated so spammers forget it unless you have something relevant to say.

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