The Pareto Principle tells us that 80% of the effects come from 20% of the causes. What exactly does this mean for busy business owners?
I’ve made it my life’s mission to study the differences between those who seemingly “get it” (people Elon Musk, Jeff Bezos, Bill Gates, and Richard Branson to name a few), and those who go about their lives wondering what the “other side” knows that they don’t.
I used to think they were smarter than the rest of us.
I used to think they had a secret that, if I could just have one moment with them, they’d reveal it – and voila! I’d have all the wisdom I needed to become the “Super-prenuer” I always believed I was capable of becoming.
I heard Richard Branson speak, and left the auditorium thinking, “Hmm… There’s got to be more…”
I met Warren Buffett, and I left wondering if there was still something he wasn’t telling me.
I even took a billionaire out to lunch in Fiji, and still left the table with no more clarity than I had before…
The 80/20 Principle of Business Success
What do these people know that you and I don’t?
And here’s what I realized… It’s the 80/20 principle:
When you started your business, you inevitably invested 80% of your time working ON your business, and only 20% of the time working “IN” your business.
You needed the sales, so you naturally prioritized what was most important to bring you money.
As long as you worked “ON” your business, you were driving results forward. This is the 80/20 principle in action.
Your results were directly proportionate to the amount of time you dedicated to working “ON” your business.
Then at some point, you got more clients and hired more employees…
You had to handle fulfillment, project management, employee training, customer support, billing, etc.
Each of these activities removed you from the time you spent working ON your business, and moved you to working IN your business.
…And the proportion of time spent ON your business to working IN your business flipped…
Revenues started to plateau…
Working ON Your Business vs. Working IN Your Business
Understand that when you’re working ON your business, you’re actively moving the needle forward 🙂
When you’re working IN your business, you’re involved in the day-to-day operations 🙁
The more time you spend working IN your business, the more you begin to feel:
- Like you have a high paying job
- Constant overwhelm, stress, and anxiety
You are stuck!
There had to be more than just working “ON” your business, though…
I spent decades of painstaking research, travel, and investment seeking a breakthrough.
The Pareto Principle, Revisited
Then it dawned on me during a conversation with a friend named Opher Brayer.
He’s a quirky fella with a fascinating history – and a passion to positively change the world.
Opher is a creative thinker who came up with dozens of unique methodologies and processes for developing the talent and potential within individuals. He’s worked with many of the biggest companies and most brilliant minds on the planet.
During our conversation, he mentioned that he was flying out to meet with Elon Musk…
I asked Opher:
“What makes Elon Musk so successful?”
And without any hesitation Opher said:
“Elon has a natural Pareto brain.”
If you’re not familiar with the Pareto Principle, let me briefly explain…
In the simplest definition, the Pareto rule is:
80% of the effects come from 20% of the causes.
In other words:
- 20% of your profits come from 80% of your clients
- 20% of your efforts produce 80% of your profits
- 20% of your employees create 80% of the results
…And so forth.
Read more about the 80/20 principle here.
The principle has been proven over and over and over again…
Consider these FACTS:
- 20% of the world’s population controls 82.7% of the wealth
- 20% of Italian citizens own 80% of the land
- 20% of all Microsoft’s reported bugs result in 80% of the related errors and crashes
- 20% of hazards result in 80% of injuries
- 20% of patients have been found to use 80% of healthcare resources
- 20% of criminals commit 80% of all crimes
Another practical application of the Pareto Principle: 80% of your results come from only 20% of your clients. Read more about it here: “The Dream 100 Strategy: The Sales Strategy Used To Win Huge Clients.”
The 80/20 Principle by Richard Koch
The 80/20 Principle was first introduced by economist Vilfredo Pareto in the late 19th century, but it was author Richard Koch who popularized it in his book “The 80/20 Principle: The Secret to Achieving More with Less”.
In this book, Koch reveals how entrepreneurs can use the 80/20 rule in a systematic and practical way to improve their businesses and their lives.
One of the key ways that entrepreneurs can use the 80/20 Principle is by identifying their high-priority tasks and focusing on them.
In so doing, business owners can ensure that they are using their time and resources in the most effective way possible.
The 80/20 rule can be applied to various aspects of business, including sales, marketing, operations, and management.
- In sales, 80% of revenue may come from 20% of the products or services offered.
- In marketing, 80% of conversions may come from 20% of the marketing campaigns.
- In operations, 80% of efficiency may come from 20% of the processes.
- And in management, 80% of results may come from 20% of the leaders.
By identifying and focusing on these key areas, entrepreneurs can increase their productivity and profits.
Additionally, the 80/20 rule can also be applied to personal life, like 80% of happiness may come from 20% of activities.
As you can see, the 80/20 rule is a versatile tool that can help entrepreneurs improve their businesses and personal life.
And as author Richard Koch reveals in his book, the key to success is understanding and using the 80/20 rule most effectively.
The 80/20 Principle In Action
Going back to what Opher told me about Elon Musk having a natural “Pareto brain” – he explained that Elon focuses his time doing ONLY the 20% of stuff that produces 80% of the results.
He manages his workday (down to 5-minute increments) to make sure he maximizes every ounce of productivity possible.
You, me, and Elon all have one thing in common: all 3 of us only have 24 hours in the day.
…But the biggest differentiating factor between the 3 of us is what we do with that time.
Elon maximizes his use of that time – and measures his productivity not just in terms of: “how much can I get done?”
…But also in terms of:
“What’s going to bring me the biggest results in the limited amount of time I have available?”
He chooses to tackle the 20% of activities that he’s determined will produce the most output.
Hence, the “Pareto brain.”
This same 80/20 Rule is one of the reasons why saying “no” can boost your business. Read more on The Power Of Saying “No” here.
You can apply the 80/20 rule in your business to highlight the importance of focusing on the most impactful and valuable activities to maximize efficiency and success.
Some examples include:
- Identifying the most profitable products or services: By analyzing sales data, your business can determine which products or services contribute the most to your overall revenue and focus on promoting and improving those.
- Prioritizing tasks and projects: By focusing on the tasks and projects that will impact your business, you can allot and assign your resources more efficiently and effectively.
- Analyzing and improving processes: By identifying the steps in your systems and processes that take up the most time or resources, your business can streamline and optimize those steps to improve efficiency and reduce costs.
- Evaluating marketing efforts: With 80/20 principle marketing, you can analyze which marketing channels or tactics are most effective at generating leads or sales. Your business can allocate more of its marketing budget to those efforts.
- Identifying key customers or clients: By analyzing customer or client interactions and spending data, a business can identify the 20% of customers or clients that generate the most revenue and focus on building relationships with them.
- Optimizing social media posts. Using the 80/20 principle in analyzing data on the performance of different social media channels and tactics, a business can identify the 20% of its social media efforts that are most effective at generating results.
Aside from the usual channels, take time to check out a few other alternative digital marketing networks that could boost your advertising campaigns (while costing you a lot less.)
An Exercise in Prioritization with the Pareto Principle
Now, let’s go a step further…
Elon Musk and other high performing achievers work ON their businesses.
My major light bulb moment was when I realized monstrous results come down to three things:
Most business owners struggle because they wing it.
They have no formal strategy, and their growth is more ad-hoc – unsure of where to start, what to do next, and what will make the biggest impact on their bottom line… So they guess.
Sometimes it works out well for them. Most times they end up wasting time and spending money trying to get the results they hoped for.
That’s why it’s important to have clarity and focus.
You must know exactly where you are…
Where you want to go…
And clearly identify the gap that’s holding you back.
From there, you prioritize.
Take inventory of all the opportunities you have available… And prioritize the opportunities based on which activity will bring you the biggest results – in the least amount of time and with the least amount of effort.
This is where you drill down on the 20% of activities that will produce 80% of the results.
Everything else should be delegated or eliminated.
And you execute!
Another practical application of the Pareto Principle: The Income Ascension Pyramid. Read more about it here: “Ascension Pyramid: Your Way To Bigger Profits.”
Break Through Your Business Growth Plateau with The 80/20 Principle
If you’re not taking the 80/20 principle into account, chances are you’re struggling, frustrated, and confused about why you’re seemingly getting passed up by your competition, no matter how hard you work (or how great your product/service is).
1. Change Your Behavior
The first step in smashing through your plateau is changing your behavior. You can read all the business books in the world, but none of that will matter if you don’t change your behavior.
- Get more focus and create a plan
- Establish your priorities and focus on the 80/20
- Execute fiercely
2. Do a Quick Self-Evaluation
Ask yourself these questions daily:
- Did I have clear focus for the day?
- Did I prioritize my tasks based on the 20% of the activities that will generate 80% of the results?
- How well did I execute?
3. Summarize Your Key Takeaway
After you evaluate, write down one sentence that answers the question:
“What lesson did I learn about the way I manage my time today?”
It’s a simple exercise, but the power of it cannot be overstated.
Try it for 30 days…
Notice where you are right now and how you’re feeling about your day.
Go through this exercise for a month – every day – and see how much better you perform.
Do you feel like you’re struggling to scale and grow despite your best efforts? You can also read more on “How To Overcome a Business Growth Plateau.”
A Final Word About The 80/20 Principle
The 80/20 principle is a simple strategy… with life-altering results.
Harness that powerful 20% and see what happens!
Would you like to know how to take your business to the next level? Predictable Profits is dedicated to helping top entrepreneurs (just like yourself) build best-in-class business strategies.
Schedule a complimentary coaching session with the Predictable Profits team today.
Be part of our ever-growing community of seven- and eight-figure business owners:
- Check us out on the Predictable Profits YouTube channel.
- Connect with us on Linkedin.
- Join other entrepreneurs (like yourself) on our Facebook page.
- And if you haven’t already, sign up for our daily business coaching video series (by entering your email address below).