The 80/20 Guide to Small Business Efficiency
What do you think makes a successful small business owner?
Is it a roll up your sleeves attitude? A willingness to do it all – even if that means coming in early and staying up late?
It’s probably all of the above. We must become marketers, salespeople, and customer support experts. Every day (sometimes every minute) requires us to put on different hats and solve problems.
These traits are key. A limited budget inspires us to be creative and learn about practically every aspect of business.
But this insistence on doing it all can become a liability. Once you have your business off the ground, it’s easy to work too hard and burn yourself out. Even more frustrating: the thought of spending your precious time and energy inefficiently, working on things that sound promising but don’t move the needle in terms of business results.
To make the most of our efforts and ensure our longevity, we need a different perspective.
We need the 80/20 rule.
Understanding (and Applying) the 80/20 Rule
The 80/20 rule, also called the Pareto principle, was discovered by Italian economist Vilfredo Pareto in the early 20th century. It describes the tendency that, for many events, 80 percent of the effects come from 20 percent of the causes.
20 percent of a thing to account for 80 percent of the results.
There are plenty of implications for your business, but Pareto conceived this principle as a broader law of nature. Here are just a few examples of how it plays out:
- 20 percent of job safety hazards account for 80 percent of the injuries
- 20 percent of the Italian population owns 80 percent of the land
- 20 percent of the world’s population accounts for 80 percent of global GDP
How can this help you run your business more efficiently?
If you can pinpoint your top 20 percent activities, revenue sources, and customers, you can optimize your time. Instead of just throwing everything against the wall and seeing what sticks, you can focus on doing more of what’s already working – and less of the ineffective stuff.
Here are four different ways you can apply the 80/20 principle to your business:
- Time and Productivity
Your time is your most valuable resource. It’s the only resource of which everyone gets the exact same amount every day. People like Elon Musk and Marissa Mayer have different networks and budgets, but they get the same 24 hours as you do.
So, it makes sense to start there, and assess how you’re spending it. If you’re like most small business owners, you’re trying to put in as many hours as possible. Even at the expense of your health and personal relationships.
How are you spending your time right now?
The only way to know for sure is to track it.
Commit to two weeks of measuring how you spend your workdays. Break down each hour into fifteen-minute blocks, and note which task you’re working on at each time. You can do this with a simple notebook, or try one of the time tracking tools available online (many are free).
This sounds tedious, and it can be. But it’s crucial. Tracking our time is the only way to get a handle on how we’re actually spending it. Otherwise, it’s easy for our minds to deceive ourselves into thinking we’re being more effective than we really are.
Try this out for yourself, and you’ll spot productivity holes immediately. Patterns emerge. Maybe you’re spending a lot longer on those social media breaks than you thought. Simply measuring how you spend your time will give your productivity a nice bump.
Once you have a few weeks’ worth of data to assess, you can figure out which hours of the day are your most productive. They might not be what you thought! Then you can rearrange your schedule so you’re tackling your most challenging tasks (product creation, marketing, etc.) during your peak productive times.
Also, be on the lookout for low-productivity times. These are great for simple (but necessary) admin tasks like invoicing. If your budget allows, see if you can outsource some of these tasks or hire an employee to help you. Then you can take that hour or two to catch up on some sleep or exercise – both great investments for long-term health.
- Highest-Paying Customers
The 80/20 principle states that 20 percent of your customers are responsible for 80 percent of your revenue.
This is mind-blowing, if you really think about it. Through these high-spenders, you have a wonderful opportunity to grow your business.
Every customer deserves a quality experience. But your best customers deserve to feel extra special, because they are.
Have you identified these people? Once you figure out which people are driving most of your business, it’s much easier to sell more to those happy customers than to bring in new ones.
Your top customers deserve some extra attention. This could come in the form of a loyalty program, special discounts, or coupons just for them, or even free gifts. Your options here are only limited by your imagination. It might be something as simple as a handwritten note thanking them for their patronage.
The key thing here is to make them feel valued. They could have taken their business somewhere else. They’re already spent a lot of money with you. And, chances are, they’re willing to spend more as long as they feel appreciated.
Marketing expert Jay Abraham says there are only three ways to grow a business:
- Get more customers
- Increase the average customer lifetime value
- Increase the number of times your customers buy
By paying special attention to your top spenders, you’ll hit the second and third items from the list. It’s a much more cost-effective way to increase revenue without the constant pressure to bring in more customers. Pareto would approve!
- Most Profitable Products/Services
It’s always tempting to expand your product line or menu of services. Maybe if you just offered more things to buy, you’d make more money.
This makes sense. It might increase your revenue, but it could also backfire. Every new offering means more time spent managing inventory and assisting unhappy customers. Small business owners can end up so overwhelmed that the quality of their entire product line suffers.
Should you offer more products? Fewer products? The same as you’re offering right now?
You can gain clarity with an 80/20 analysis.
20 percent of your product line accounts for 80 percent of your revenue. If you’re looking to streamline and simplify, you could cut down a few offerings and focus on making the big money generators even better.
This is a business decision, and one that ultimately depends on your long-term goals. But plenty of businesses have become wildly successful by focusing on just one (or a couple) of products:
- Basecamp, formerly 37signals, used to multiple software suites before deciding to cut all of their offerings except Basecamp (a project management software). They even renamed their company after their most successful product!
- You might know Crocs as those kind of ugly, but super comfy, foam sandals everyone seems to be wearing today. Although the company offers different variations of the sandal, they’ve sold over 100 million pairs focused on that single product alone.
- Trader Joe’s only carries around 4,000 stock keeping units (SKU’s) per store. That sounds like a lot, but the typical grocery store chain carries over 50,000!
- Most Effective Marketing Techniques
It today’s marketing advice had a mantra, it would probably sound like “more, more, more.”
Everyone is urging us to “be everywhere.” Explore different channels. Try new social media platforms. Become wizards of Facebook ads, SEO, and blogging – all at once.
You can see how this is a recipe for confusion and overwhelm. Yes, some of those tools will work great for you, but it’s highly unlikely that all of them will.
Wouldn’t it be easier to focus on a couple tactics that drive the most results?
It’s time for an 80/20 analysis.
If you haven’t done so already, set up an analytics tool so you can see which sources are driving website traffic. Measuring marketing ROI can be a bit trickier for brick and mortar businesses, but tools like call tracking and discount codes will help.
Measurement is non-negotiable. Once you have data about where your leads and customers are coming from, you’ll start to see patterns. You’ll identify key traffic sources, as well as the ones you could probably do without.
Instead of trying to blog, podcast, and shoot videos, pick the one that’s working best. Instead of dabbling in half a dozen social media platforms, pick one or two that drive the most traffic.
This simplifies the marketing puzzle. Your efforts become more effective because they’re focused on what’s already working. It takes less time to gain a critical mass of followers – and some real traction. That leaves you with more money to re-invest and expand into other channels as you see fit. Win, win!
Free up Time and Grow Your Business
Running a small business is challenging enough already. We can’t afford to run ourselves ragged trying to do every little thing.
An 80/20 analysis will help you focus on what really matters. You’ll spend more time on things that drive results, and less on things that sound good in theory but don’t really increase your revenue. Most importantly, you’ll free up precious minutes in your day you can use on your health and relationships.
Have you ever done an 80/20 analysis on your business? If so, what did you find that surprised you? Leave a comment below and let me know!