The 80/20 Rule Can Kill Your Business!

Vilfredo Pareto, an Italian economist in the early 20th century created a mathematical formula to describe the inequality of wealth within nations. He stated that 80% of assets were owned by 20% of the people. This observation was later applied to many other phenomena and became known as ‘The Pareto Principle.’ No observation is more damaging to developing a fast-growth, highly profitable businesses than the application of The Pareto Principle, or the 80/20 rule.

Businesses have frequently taken the 80/20 rule to mean that 80% of the good stuff (profits, revenues, new business, etc.) comes from 20% of the participants (customers, product lines, and, especially, salespeople). I know the following may sound obvious: if 80% of your sales come from 20% of your salespeople, then it follows that 80% of your salespeople are producing only 20% of your sales, or 80% of your customers are producing only 20% of your revenues. Think about that for a moment.

“Make sure that you allocate 80% of your resources to the 20% that produce the results!” shout consultants. I say you should allocate 100% of your resources to increasing the 20%. Every salesperson must be extremely profitable. Every customer must be profitable (or have a darn good strategic reason for not being profitable). You can longer apply resources, any resources, to activities that don't vault your business forward. Jack Welch says you should be turning over 20% (I don't think that 20% is a coincidence) of your workforce every year – upgrading at every turn. Stop settling for mediocrity. Today, when customers and companies lack time and attention, if you want to be a fast-growth company, or if you want to accelerate your growth rates, you cannot afford to live by the 80/20 rule.