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APPLYING THE PARETO PRINCIPLE TO INCREASE PROFITS

Vilfredo Pareto was an Italian mathematician who lived more than 100 years ago. He discovered what is known to many as the 80/20 rule. That rule basically states that small actions produce the majority of results.

For example, count the total number of clothes in your cupboard, and then count how many of those clothes you frequently wear. You will find that you wear about 20% of your clothes 80% of the time.

Your business is no different. According to Pareto, 20% of what you do every day at work is producing approximately 80% of your total revenue. But on the flipside, it also means that 80% of your daily activities produce only 20% of your total revenue.

Now consider what would happen to your profits it you replaced the 80% of your non-productive activities with more productive activities. You would see your revenue skyrocket, right?

The critical few vs the trivial many

Answering the phone, responding to emails, ordering supplies, paying the bills, keeping the books, surfing the internet. These are not high profit-producing activities. While these are functions that frequently need to be done in most businesses, you shouldn’t be the one doing them. For the most part, these are administrative job functions that can be accomplished in much more efficient and cost-effective ways.

The major problem is that most business owners spend so much time on the “trivial many” that they never get around to completing those “critical few” activities that will produce the greatest results… and the highest revenue.

Our business coaching programmes help business owners identify which activities in the business are truly “high profit-producing activities”.

These typically include activities such as:
  • developing and creating new products or services
  • improving your current product or service
  • marketing that new product or service
  • developing joint venture relationships or affiliate programmes
  • innovating your product or service so that it makes your business unique and superior
  • acquiring elements of proof to use in your marketing such as testimonials or research
  • locating and securing a marketing channel that gives you access to additional prospects
  • spending an hour interviewing a customer or prospect so you gain better insight into their thinking or actions.

The great thing about applying the Pareto 80/20 Principle is that you don’t have to do anything different to what you’re already doing. You just have to do more of the income-generating stuff, and less of the peripheral stuff.

And that’s just the start of it…

How else can you apply the Pareto 80/20 rule to your business? 20% of your marketing is producing 80% of your leads. Identify the 20% and do more of that. 20% of your customers are responsible for 80% of your income. Look after them and replace the others with more just like them. 20% of your products are generating 80% of your profit. Could you scale back the non-performing products?

It’s an interesting exercise. Take some time to crunch the numbers, apply some focus and watch your revenue take off. I’d be delighted to show you how. Give me a call.

Have a great weekend.

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