The most useful RULE in business! Ask these 25 questions to POWER UP your strategy

The Pareto Principle: Introduction to the 80/20 Rule

In this week’s article I’ll give you 25 questions which can help you improve your strategy using the Pareto Principle. Asking these questions will help you identify hidden trends and find the hidden drivers of your business to take it to the next level.

Pareto in business

Everyone knows about Pareto, although not always by that name. It’s often referred to as the 80/20 rule. People often throw around the idea that 80% of your revenue comes from 20% of your clients (and it’s true!). But this principle, also known as the Pareto Principle, goes far just beyond just revenue. It permeates every aspect of your business, offering a framework to identify inefficiencies, refocus efforts, and make better strategic decisions.

Once you start looking for the 80/20 rule, you'll find it everywhere. More importantly, you’ll see how acting on these insights can transform your business.

Looking for ways in which the principle applies to your business is what underlies effective strategy discussions and strat sessions. It helps you cut through the noise to home in on what drives your business.

The Pareto principle is the waving flag that signals where you should look for clear data on your business and a launching point for more experiments to prove or disprove the beliefs on which your base decisions.

Some places you can find Pareto at work in your business

Client Relationships. In many businesses, 20% of your clients generate 80% of your revenue. These are your high-value clients. But have you considered the flip side?

Support Costs. 20% of your clients generate 80% of your support calls & support costs. Often most of the support needs and client issues comes from the 80% of clients that pay you very little money. You often lose money servicing these clients!

Product Complexity: 80% of your clients generally only use 20% of your product’s features. The 80% of seldom used features make the product hard to sell and hard to train people on.

Your Star Performers. In most organizations, 20% of employees are responsible for 80% of critical work and the success. These individuals drive results, solve problems, and lead crucial projects which drive the organisation. Identifying and supporting them is crucial.

Questions you can ask to bring Pareto into your strategy discussions

The 20% of High-value customers (HVCs). We tend to spend a lot of time and effort on the 80% who contribute very little revenue (low value customers, or LVCs), and the high revenue customers get treated the same as the low revenue clients. Questions to consider:

1. Are you giving the HVCs better treatment than the other 80%, or the same?

2. What similarities are there between the HVCs in terms of profile, product, industry, etc.?

3. Why do they pay you so much more? They must be unlocking a lot more value through your company; what do they get from you?

4. Are there enough similar types of companies that we can build a business around only servicing them and not serving the LVCs?

5. What features of your offering do they use that is different to other customers?

6. What benefits do they get from using you that they can’t get elsewhere?

7. Do your sales incentives drive people towards landing customers that fit the HVC, or is it easier for the sales team to land the small LVCs?

8. What level of skilled support and account management do you provide to the HVCs compared to the LVCs?

For the 80% of clients generating only 20% of revenue: You will likely discover that your efforts here aren’t paying off. What would it look like if you focused less on this group and doubled down on your top 20%? it's worth asking:

9. What is the minimum cost to serve these clients profitably, and how does that compare to your current pricing?

10. Do you currently make money on these clients once you factor the amount of support and service you provide to them?

11. What would happen if you charged these clients for their higher support demands?

12. Would they then optimize their use of your services instead of wasted support hours?

13. Would we make more money if we stopped servicing these clients altogether and redeployed resources towards better servicing the high value clients?

Product Complexity. If you focused on the most used 20% of your features (or products in a product business), you could simplify sales, implementations, reduce support burdens, and streamline R&D. Simpler products often lead to happier clients and products that are easier to sell, implement and train users on. This leads to more sustainable growth. Questions to consider:

14. What are the 20% of features which get 80% of the use?

15. What are the features which lead to 80% of the complaints and can you cut them?

16. If you’ve gone through a positioning exercise, what are the 20% of features that will give your target profile clients 80% of the features they need?

17. What would the business be like if we simply terminated the 80% of seldom used features?

Your Star Performers. You should spend most of your time and effort on the handful of staff that generate most of the results. Often, we spend most of our time on the poor performers. This is the wrong approach, you are depriving your key people of your time, attention and support to focus on the poor performers who seldom get any better. Questions to ask:

18. Who are the 20% of the staff that do 80% of the work?

19. If I had to build a company / team from scratch, who would I want to start again with?

20. Are you spending 80% of your time on those people?

21. How are you supporting them?

22. What special treatment are you giving them?

23. How are you recognizing them?

24. What do they do differently that you can learn from and possibly get others to emulate them in doing?

25. Are you renumerating them better than the 80% that only contribute 20%?

Where to from here?

The next time you wonder how you can improve your business spend some time looking at the evidence of Pareto in your business and factor these questions into your next strategy discussions. You’ll be amazed at what you come up with that can drastically improve your business.

Until next week

Clive

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