How To Apply The 80/20 Rule - Part I

Making money online is only different from making money in the tangible world of bricks-and-mortar in that the technicalities are different.

You could compare just about every aspect of a “real world” business to an online one, and one of the general rules of business (and life in general) is known as the 80/20 rule.

The Clever Italian

In the late 19th Century, the Italian economist Vilfredo Pareto suggested this, and it became widely known as Pareto’s principle because of Josepth Juran (who sadly died last year). Juran is mostly known as being the main evangelist for quality in all things related to business.

80/20

Pareto suggested that ROUGHLY 80% of any effects come from 20% of the causes. While he originally applied this to land ownership in Italy (20% of the people owning 80% of the land), both he and Juran realized that this could easily be applied to all things.

In Business, this rule stated two apparent things: 80% of your business will come from 20% of your customers AND, 80% of your problems will come from 20% of your customers. The interesting part about this is that IT’s NOT THE SAME 20%! There IS a correlation between the two, but it’s not what you might expect.

Inverse Correlation

The connection between these two figures is quite the opposite to what you would at first think, but on further investigation, it becomes clearer. If somebody is trading with you regularly, they know your products, they know the way you do business, they know your staff etc. In fact, they are very familiar with your company in all respects, so they RARELY have problems, and when they do, they know how to resolve them (who to call, whether they should email or phone etc.).

The 80% of your customers who do only 20% of your business with you are NOT so familiar with your company and the way it operates, nor do they know who to call or how best to contact them. THESE are the people from where most of your problems will arise. They may not even know how best to order from you, so are more likely to make mistakes from the outset.

In part II tomorrow, I’ll discuss how to best apply the 80/20 rule to your business life.

Luke.