The Pareto Effect

Also known as the 80/20 rule, this is one of the most helpful concepts for not only sales people but also from a general life and time management point of view. It is where 20 percent of your activities will usually account for 80 percent of your results. Simply knowing this can change the way you set goals for the rest of your life.

I’ve seen direct results from applying this in business myself, but the biggest result I have ever seen (see the last paragraph if you read nothing else in this blog) was via application to an ex-colleague’s client bank after discussing it with him at lunch one day.

What Is The 80/20 Rule?

The 80/20 rule is also known as the “Pareto Principle” after it’s founder, the Italian economist Vilfredo Pareto. Basically, he noticed that people in society seemed to divide naturally into what he called the “vital few,” i.e. the top 20 percent in terms of money and influence, and the “trivial many,” i.e. the bottom 80 percent. Later, he went on to discover that almost all economic activity was subject to this principle, in that 80 percent of the wealth of Italy during that time was controlled by 20 percent of the population. We can take Pareto’s 80/20 rule and apply it to almost any situation. In particular, we can apply it to goal setting and productivity, very useful from a sales point of view.

The 80/20 Rule In Action

If you have a list of ten items to accomplish, two of those items will turn out to be worth more than the other eight items put together. The sad fact is that most people postpone the top 10 or 20 percent of items that are the most valuable and important i.e. the “vital few” and keep themselves busy instead with the lesser important 80 percent, which contributes very little to their success but are “easier” to complete.

How To Apply The 80/20 Rule

Here is what you should do in order to effectively apply the 80/20 rule to your goal setting and your overall productivity:

1. Take a piece of paper and write down ten goals. Then ask yourself: If you could only accomplish one of the goals on that list today, which one goal would have the greatest positive impact on your life?
2. Pick the second most important goal. What you should find is, after you complete this exercise, you will have determined the most important 20% of your goals that will help you more than anything else.
3. Continue to work at those goals that you have chosen as the most valuable all the time.

Eat The Biggest “Frog” First

You will often see people who appear to be busy all day long but seem to accomplish very little. This is usually because they are keeping busy working on tasks that are low value while they postpone the one or two activities that could make a big difference to their company and to their career. Usually the most valuable tasks you could do each day are often the hardest and most complex, but the payoff and rewards for completing them can be tremendous. Why not before you begin work, ask yourself, “Is this task in the top 20 percent of my activities or in the bottom 80 percent?” The rule being - don’t give in to the temptation to clear up the smallest jobs first. If you choose to start your day working on low-value tasks, you will soon develop the habit of always starting and working on low-value tasks.

Work Towards Your Main Goal, All The Time

A study was done about the attitudes of rich people versus poor people with regard to goal setting. What they found is that 85% of rich people have one big goal that they work on all the time. So, if you want to be wealthy, do what wealthy people do. Pick one big goal and work on it all the time and if you do, it could change your life.

The 80/20 Rule In Real-World Action

An old colleague of mine in a previous life was working as a Financial Adviser in the Financial Services Industry, and he was paid very good commission for his advice (selling products independently of any specific provider). His main goal was to double his income over the next three to five years.

We discussed his client bank and applied the 80/20 rule to his client bank within a spreadsheet after discussing this 80/20 concept with him. He did find that roughly 20 percent of his clients contributed to 80 percent of his business profits, and that the amount of time spent on a high-profit client was pretty much the same amount of time spent on a low-profit client (he did 6 month and annual reviews with everyone). In other words, he was dividing his time equally over the number of tasks that he did while only 20 percent of those items contributed to 80 percent of his results. We discussed these findings and decided to draw a line under his list of clients who represented the top 20 percent and then he either called in other professionals in his industry and very strategically handed off the 80 percent of clients that only represented 20 percent of his business. In fact he sold off most of this part of his client bank back into the partnership from where it was originally purchased, keeping the best clients for himself (rinsed & repeated - buying out other financial advisers over the next few years and doing the same with their client banks).

He then put together a profile of his top clients and began looking in the marketplace exclusively for this type of client who fitted the profile; in other words, a client who could become a major profit contributor to his organisation, and whom he in turn could serve with the high level of service that his clients were accustomed to. Instead of doubling his income in three to five years, he doubled it in within 12 months and it has got bigger every year since.