80/20 — Exponential Pareto Principle for being more effective

80% of an effect being studied will be generated by 20 percent of the examples analyzed.

When you are doing a data-intensive analysis on your computer, play around with the numbers. Sort them in various ways. Whenever you see an 80/20 in action, you should look for the opportunities it implies.

Examples:

  • if 80% of the sales come from 20% of your sales force, what is that 20 percent doing right, and how can the 80 percent be brought up to speed?
  • Do you really need the other 80% at all?
  • 80% of our work is not useful.
  • Your client will eventually use 20% of his reports.

The 80/20 rule is not always strictly true; in one case, the true ratio may be 75/25, in another 90/10. Furthermore, it is not universally applicable, but it frequently occurs to make it a useful predictive tool.

Lessons Learned

When you are interpreting your analysis, you have two parallel goals :

  • you want to be quick
  • you want to be right

Obviously, these two goals are sometimes in conflict. It is usually worth taking an extra day to make the difference between getting the right answer and the wrong one. However, there is probably little point in spending an extra week to go from three decimal places of accuracy to four.

Lesson #1 - Always ask: “What’s the so what?”

What does it tell us, and how is that useful? What recommendation does it lead to?

If you cannot draw insights from what you have just done, it is a waste of time. Crunching numbers for the shake of crunching numbers, or doing bar charts for the shake of doing bar charts, does not help unless it brings to life some insight, some key findings that will make your team and your client say, “Hmmm, interesting.”

We must take the disparate messages of analyses and synthesize them into insights to solve our client’s problem.

Lesson #2 - Perform sanity checks

A sanity check consists of a few pointed questions, the answers to which will show whether a recommendation is feasible and whether it will have a noticeable impact on the organization.

Lesson #3 - Remember that there are limits to analysis.

Even if you are a skilled decision-maker with reliable intuition, good analysis helps support and communicate your solution throughout the client organization. Like the yin and yang, data without intuition are merely raw information, and intuition without data is just guess-work. Put the two together, however, and you have the basis for sound decision making.

Educational Background

The Pareto Principle, or “80/20 Rule,” is an incredible tool for growing your business as it is frequently called today. For instance, if you can figure out which 20% of your time produces 80% of your business’ results, you can spend more time on those activities and less time on others. Likewise, by identifying the characteristics of the top 20% of your customers (who represent 80% of your sales), you can find more customers like them and dramatically grow your sales and profits.

Now while savvy business owners and executives have used the Pareto Principle or 80/20 Rule for years, a recent and unique interpretation of the principle has taken its importance and power to a whole new level.

I learned about this innovative interpretation in Perry Marshall’s incredible book, “80/20 Sales and Marketing.”

Here’s how Perry Marshall has taken the Pareto Principle to the next level. He found that the Pareto Principle is exponential! Let me explain. We already know that 20% of your customers represent 80% of your revenues. What Marshall found is that, within that initial 20%, the 80/20 rule also exists. Meaning that the top 20% of the top 20% of your customers (or the top 4% overall) represent 64% of your sales (calculated as 80% times 80%).

Now you have a distribution in which the top 4% of your customers account for 64% of your sales. So you can find more customers like them. And importantly, the Pareto Principle scales to the third power, fourth power, and so on when the numbers are great enough.

Importantly, Perry Marshall’s “80/20 Sales and Marketing,” succinctly explains the Pareto Principle's exponential power and then focuses on ways to apply it to your business to grow sales and profits quickly. For example, he teaches his “rack the shotgun” technique for quickly identifying potential customers who are ‘top 20%-ers’. He explains how to use the principle to get customers to call you (and never have to cold call again). He shows how to use the 80/20 rule to hire the absolute best talent. And perhaps most importantly, he explains how to use the rule to generate the maximum value and profits from your customers.

The Pareto Principle or 80/20 rule is a potent tool, when properly applied, for growing any business. The key is knowing how and when to apply it and leveraging its exponential properties. Perry Marshall does an outstanding job in his book of providing clear examples and action steps for businesses to reap great profits. As the master user of the Pareto Principle, I’m assuming he’s using this unique technique to identify the top 20% of the top 20% of business owners and executives. That’s powerful.

Thank you for reading!


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