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In my second post on the 7 deadly mistakes new entrepreneurs make and how to avoid them, we discussed two more potentially deadly mistakes many new entrepreneurs make. In this post we will address another deadly mistake that both new and experienced entrepreneurs make. This mistake can be quite deadly and can affect all aspects of your business and personal life. What is it?

Deadly Mistake 5: Not recognizing and consistently applying the 80/20 principle

The 80/20 principle has been called by many names including the Pareto Principle, the Pareto Law, the 80/20 Rule, the Principle of Least Effort, and the Principle of Imbalance. As some of the names suggests this principle was discovered by Italian economist Vilfredo Pareto (1848-1923) in 1897.

What did Pareto discover?

To put it in its simplest form Pareto discovered a counterintuitive imbalance between causes and results. In other words, we naturally expect that 50% of the inputs to a process will produce 50% of the result, but this is not usually accurate. It is more likely that a smaller percentage of inputs will produce a disproportionately large amount of result. Indeed many times 20% of the inputs produce 80% of the result (see important note at the end of the post).

What does this mean to the entrepreneur?

This principle has far reaching implications for the entrepreneur. For example, we tend to think that all the activities we do are equally valuable in moving us forward. This is simply not true. There is an imbalance. Indeed 20% of the activities provide 80% of the results we desire. Further, the other 80% of the activities only add an additional 20% of the results we seek. This is instructive because it says that as entrepreneurs we should focus on the 20% activities that give us 80% of our results and delegate the other activities.

Another example of the 80/20 principle at work

We as entrepreneurs tend to think that all of our customers are equally valuable and should be treated equally. Using the 80/20 principle we would discover that 20% of our customers provide 80% of our profits. Here are a few ways you could use this information:

1. Do research and determine who these customers are
2. Interview these customers and find out why and how they use your product or service
3. Profile these customers so you can go after other customers with similar characteristics
4. Align your resources to serve these customers more effectively
5. Figure out ways to convert more of your customers into this category of customers

There are many other such imbalances. For example 20% of your products provide 80% of your profits and 20% of your employees produce 80% of your desired results. The point of this post is to get you to diligently look for these imbalances and find ways to use them. If you don’t, it can be deadly to your business.

Why not using this principle can be deadly

Hopefully it is obvious how this principal can be useful to you. It can be deadly if you don’t recognize and use this principle because you will not move forward effectively and you will miss huge opportunities. For example, simply not focusing on the 20% of customers that bring 80% of your profits can cause you to go out of business. This is deadly.

Important note

I know that this is an over-simplification of the Pareto principle. I wanted to keep it simple for the purpose of making it useful. There is a lot of variety in this principle that I plan to present in future posts. For example, it is an over-simplification to say that the split is always 80/20. It is not. It can be 60/40,70/30 or 99/1. The key is that there is an imbalance and we can exploit this imbalance.

Additional resource

For more information check out Richard Koch’s site.

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