The 80/20 Principle Multiplied: The Law of the Vital Few
Andy Duncan, Founder, Netslingers
Most companies rejoice in gradual steady upward progress in revenues and after-tax profit. But what if an organization wants exponential growth instead? How is that achieved? One essential to realizing extraordinary growth comes from the belief or expectation that it CAN happen. Exceptional results are produced from visionaries who are blind to the ordinary, and Steve Jobs’ quote is always a good example of that principle: "We're here to put a dent in the universe.”
The second dynamic lies in the century-old principle called the Pareto Principle, which is also known as the 80/20 Rule. First identified in 1896, Italian scientist Vilfredo Pareto noted that 80 percent of Italy’s land was owned by 20 percent of the population. Since then, observations in economics, business, and even occupational health and safety statistics have supported the notion that 80 percent of results come from 20 percent of the efforts. The most commonly cited business reference is that 80 percent of a company’s sales are generated by 20 percent of the sales force.
The Pareto Principle multiplied
The real power of the model comes in applying Pareto’s Principle, which is also aptly called “the law of the vital few.” In this context companies that seek rapid gains in sales and profitability use a multiplied version of this concept over and over again. Here’s how. If a company of $10 million in sales has 100 salespeople, the Pareto Principle would suggest that 80 percent of the company’s sales ($8 million) comes from 20 salespeople. Those 20 each sell approximately $400,000. If the company wants to expand substantially, they would find 80 more people that would sell $400,000 each in order to bring revenues to $40 million (100 x $400k) just like that. Applying the 20 percent again, some 20 salespeople from the new pool would account for 80 percent of $40M, or $32M. The 20 would generate $1.6M each. Hiring, and then having 100 people selling $1.6M each would bring revenues of $160M. A new sales and profitability curve might look like this.
The multiplied or leveraged (80/20 squared or 80/20 cubed) version of the basic principle might seem riskier, but it is not. Targeting the 20 percent of the 20 percent of customers who have shown their loyalty and are hungry for an opportunity to get more of whatever a company offers takes less guts not more.
Applying the multiplied Pareto Principle
Substantial profit and sales growth comes in applying the multiplied Pareto Principle to expenses and to hiring. If human resource departments would analyze the traits of the top 20 percent of the company’s salespeople, they would recruit individuals with the same attributes by advertising accordingly. Based on the principle, only 20 percent of the applicants will actually follow the instructions for applying. Only 20 percent of those will show up to the interview on time. Only 20 percent of those will show up dressed properly. Every cut of the interview pool saves time and money.
The principle also applies to monitoring marketing (and other) expenses. Determine which customers respond to which campaigns. Segmenting lists of customers will help minimize cash outlays and produce better results for each marketing dollar spent. Leveraging results by dispassionate analysis makes some managers nervous, but in truth, the winning method involves ruthless application of an exponential (80/20 cubed) Rule.
Make it work
As the transition to a multiplied 80/20 rule unfolds, it is important to know which of the “vital few” resources need attention and how to approach the day-to-day management of them for maximum results.
- Think in multiples by continuing to slice the results groups more thinly and the causal groups more painstakingly, whether it’s sales, engineering, systems, or expenses. Identify the 20 percent and apply the 20 percent rule to the resulting “few” as shown in the sales example above.
- Understand that not all customers are created equal. Great example: season ticket holders should be separated out from normal fans and be treated very differently from those who buy their tickets on game day.
- Segment donor, client, and sales lists, and then test, test, test. Say the season ticket holders are given a chance to meet their favorite player, and test to make sure that specific promotion enhances their loyalty. Or was it the expensive zipped jacket with the team’s logo embroidered on the front that appeals to the company’s best customers?
- Stop the bleed or “fail fast” if something is not working. Perhaps, testing showed that season ticket sales flat-lined or decreased. Stop giving out jackets. Change the player meeting to a bragging-rights hosted cocktail party in the VIP booth. Test again.
Size doesn’t matter
Any size company from a sole practitioner to a multi-billion dollar corporation can use the 80/20 multiplied rule for hiring, marketing and managing. While more established companies might have the luxury of re-positioning salespeople who are not performing and using their expertise in other parts of the company, they often have the challenge of executing quickly. On the other hand, smaller companies are more agile, but in some cases do not have the resources to re-position truly valuable, but sometimes misplaced personnel, or to re-tool systems based on the 80/20 cubed findings. No matter the industry or entity size, the analysis will be useful and the results, profound.
Think big and slice small
The 80/20 Rule, the Pareto Principle, or the “law of the vital few,” has been around for over 100 years. It has been proven time and again through scientific research and through anecdotal evidence. For business, the unlimited power of the equation can be pushed to an extreme by continuing to reduce the equation and applying the findings to key performance indicators. Bottom line, a percentage of results derives from something quite different than a 1:1 ratio of inputs to outputs (it can vary widely from 80/20, like 95/5 or 65/35). If organizations continue to slice the inputs based on the results, they can pinpoint and leverage the outputs exponentially.
True visionary leaders seek to avoid the ideal of incremental growth. Instead, by analyzing every facet of business through a repeated application of 20 percent of the 20 percent, strong leaders will be thinking exponentially. That mindset affects the growth of the company in sales and profits, especially if the rule is applied not just to revenues but also to expenses, hiring, and systems. By believing the entity can do more on all fronts, the entrepreneur, CEO, and non-profit boards have a better chance of seeing it happen. Acorns become mighty oak trees because they don’t have anything stopping them. Visionary people create visionary companies by applying the 80/20 rule (multiplied) to their dreams and acting accordingly with focus and passion.
About the Author
Andy Duncan is the founder of the Netslingers Group. "Netslingers" is a consulting and marketing firm that specializes in lead generation and conversion, joint venture partnering, and cash flow strategies that greatly impact a company’s bottom line. For more information, please call 289 577-1667 or email firstname.lastname@example.org