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The Pareto Principle

"Principle: You cannot overestimate the unimportance of practically everything."
-John C. Maxwell, Developing the Leader within You

Robert K McKain said, "The reason most major goals are not achieved is that we spend our time doing second things first."

When running a business it is easy to become distracted by the mundane and petty things around us. It is all to easy for our attention to become trapped in something insignificant and our focus pulled way from what is important. Setting priorities in our activities is one way we can ensure that we stay on track. Look at how your activities and actions assist or impede your progress towards expansion. Your time is valuable. Look at how much of it is spent working on achieving your goals and how much is not.

On April 14th, 1912 a great ocean liner, The Titanic sank. One interesting story which emerged from that event concerns a woman getting into a lifeboat suddenly stopped and, turning around, rushed off stepping over money and jewelry scattered on the decks. She reached her cabin and, ignoring her own jewelry, grabbed some oranges, rushed back to the lifeboat and jumped in. A dramatic shift in priority when an emergency arrives.

Determining a priority will depend on what your goal is at a particular time. The goal of the woman on the Titanic was to survive the open sea. She adjusted her priorities to fit her goal.

What sort of goals should you have in relation to what you want?

What is The Pareto Principle?

The Pareto Principle is a method of isolating your time, money, activity or priorities in such a way that you are able to increase those things that will assist you in achieving your goals quicker while at the same time decreasing those things which would impede or stop your progress towards the accomplishment of your goals.

It is also known as the 80/20 principle. It describes a ratio of one thing to another. Sales people know it well and are taught it in the early stages of their sales training.

Basically it demonstrates that 20% of your time, activity, money, etc will produce 80% of your results.

Here are some examples:

Pareto Principle

20 Percent of your work will produce 80 percent of your results
20 percent of your money will produce 80 percent of your profit
20 percent of a book will contain 80 percent of the content
20 percent of the people will eat 80 percent of the food
20 percent of the people will have 80 percent of the money
20 percent of the products will produce 80 percent of the profit
20 percent of your customers will be responsible for 80 percent of your profit
20 percent of your customers will produce 80 percent of your complaints
20 percent of your orders are more likely to be fraudulent orders

Also the other way round.

80 percent of your work will produce 20 percent of your results
80 of your money will produce 20 percent of your profit
80 percent of a book will contain 20 percent of the content
80 percent of the people will eat 20 percent of the food
80 percent of the people will have 20 percent of the money
80 percent of the products will produce 20 percent of the profit
80 percent of your customer will be responsible for 20 percent of your profit
80 percent of your complaints will come from 20 percent of your customers
80 percent of your fraud problems will come from 20 percent of your orders

Sales people know that 80 percent of their time is spent getting 20 percent of their sales and 20 percent of their prospects result in 80 percent of their commission. The exercise they are constantly engaged in is locating those 20 percent type of prospects to increase their commission.

A business understands that 80 percent of their profit comes from 20 percent of their customers. Their task is to either make the other 80 percent of their customers produce the same ratio of income as the 20 percent do or to reduce the 80 percent that only produce the 20 percent profit or change them for the 20 percent type of customers that produces the 80 percent of their profits.

Imagine what would happen if 80 percent of your time, energy and money which you spend on fraud and complaint problems was reduced to 20 percent? What a difference that would make!

We need to understand how we can use this principle to reduce complaints and fraud to an acceptable maximum. Perhaps we only need to apply our policies of handling complaints and fraud to that 20%? Reducing 80% of our time handling fraud and complaints down to 20% of our time.

According to John C. Maxwell in his book 'Developing The Leader Within You', 20 percent of you priorities will give you 80 percent of your production IF you spend most of your time, energy, money and personal attention on that 20 percent.

Use the Pareto Principle, in relation to Complaints and Fraud, to isolate that 20 percent of your priorities that will reduce your losses the most. This means putting into place policies, processes and procedures that will effectively reduce those handicaps to the irreducible minimum.

For example, categorizing your complaints will help you to locate areas of your business which require the most attention. Perhaps 80% of your complaints come from long delays on the phone. Correcting this with a change of policy on how clients are handled by phone would result in an 80% drop in complaints in this example.

Isolating those successful actions which resulted in an sudden increase in business; perhaps a special discount offered or a particular phasing in your advertising, could result in an increased flow in business thereby.

Discovering that 80% of the communications in the company are a waste of time due to the same communications being bounced around with no result and putting in place processes to ensure this does not happen can reduce the amount of company time wasted.

Even one's own inbox or incoming communications or documents. Picking up a document or paper and actually handling it on the spot rather than putting it down again with the thought 'I will handle that later', will reduce wasted valuable time and energy as the matter will not then require handling twice.


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