In answer to our recent poll: “What Is Your Main Challenge to Continue Growing Your Business?”
52% of small business owners answered they needed more resources, specifically time and knowledge.
So, this week we want to talk about a limited resource we all need more of: time and how to use it wisely.
As a small business owner, you probably recognise you need to spread yourself thin across so many activities which although needed, are not necessarily contributing to grow your business.
Are you familiar with the 80-20 Rule?
The 80-20 rule, also known as the Pareto Principle, asserts that 80% of outcomes (or outputs) result from 20% of all causes (or inputs) for any given event. In business, it means that basically only 20% of what you do each day produces 80% of your total revenue.
The goal of the 80-20 rule is to identify inputs that are potentially the most productive and make them the priority. For instance, once managers identify factors that are critical to their company’s success, they should give those factors the most focus.
At its core, the 80-20 rule is about identifying an entity’s best assets and using them efficiently to create maximum value.
Understanding the 80-20 Rule
The 80-20 rule is a precept, not a hard-and-fast mathematical law and often it is misinterpreted. Business managers from all industries use the 80-20 rule to help narrow their focus and identify those issues that cause the most problems in their departments and organizations.
Although the 80-20 rule is frequently used in business and economics, you can apply the concept to any field—such as wealth distribution, personal finance, spending habits, and performance.
Benefits of the 80-20 Rule
Although there is little scientific analysis that either proves or disproves the 80-20 rule’s validity, there is much anecdotal evidence that supports the rule as being essentially valid, if not numerically accurate.
Performance results of salespeople in a wide range of businesses have demonstrated success by incorporating the 80-20 rule. In addition, external consultants who use Six Sigma and other management strategies have incorporated the 80-20 principle in their practices with good results.
How do I apply The Pareto Principle in my business?
The rule is often used to point out that 80% of a company’s revenue is generated by 20% of its customers. Viewed in this way, then it might be advantageous for a company to focus on the 20% of clients that are responsible for 80% of revenues and market specifically to them—to help retain those clients and acquire new clients with similar characteristics.
There are 5 key areas which should represent that 20% for small business owners globally. If you focus your efforts on these 5 key areas only, you will see real growth in your revenue and profit.
Those 5 Key areas are: Lead Generation, Conversion, Transactions, Prices & Profits.
Let’s say that in 2020 you generated 1,000 leads and you managed a 25% conversation rate. It means you generated 250 customers. Each customer bought from you 10 times in the year at an average selling price of €100, from which you made 25% gross profit. This means at the end of the year you generated €62,500.
If you could increase each of the 5 key elements by only 10%, it would translate in almost doubling the revenue to €100,450 what would it happen if increase a 50%?
- The 80-20 rule maintains that 80% of results come from 20% of effort
- Under the 80-20 rule, you prioritise the 20% of factors that will produce the best results.
- A principle of the 80-20 rule is to identify an entity’s best assets and use them efficiently to create maximum value.
- The key 20% of time for any small business owner should focus on: Lead Generation, Conversion, Transactions, Prices & Profits.
- This “rule” is a precept, not a hard-and-fast mathematical law.
If Time, or the lack of it, is the key area holding you back from growing your business, the implementation of this principle will be of great benefit.
However, if you are not sure how to go about it, send us an email to firstname.lastname@example.org and we will run a free audit of your business and provide you with a roadmap.