Using the 80/20 Rule to Maximize Your Business Profits
I’m a numbers geek. I like to look at excel spreadsheets and earnings reports and dive into the numbers to see if I can find a pattern of where most of my sales are coming from, what types of products sell the most, and what marketing efforts and websites lead my customers to my products in the first place.
These statistics can be a valuable asset to your business, no matter what type of small business you run. In looking at my stats from the past year, it’s very clear to me that the 80/20 rule is alive and well and applies to my online business activities.
What’s the 80/20 Rule?
The 80/20 Rule (also called the Pareto Principle) is a principle which basically says that 80% of the results will come from 20% of the causes.
Here’s some great examples from Wikipedia:
“The distribution is claimed to appear in several different aspects relevant to entrepreneurs and business managers. For example:
80% of a company’s profits come from 20% of its customers
80% of a company’s complaints come from 20% of its customers
80% of a company’s profits come from 20% of the time its staff spend
80% of a company’s sales come from 20% of its products
80% of a company’s sales are made by 20% of its sales staff
Therefore, many businesses have an easy access to dramatic improvements in profitability by focusing on the most effective areas and eliminating, ignoring, automating, delegating or retraining the rest, as appropriate.”
How does the 80/20 Rule Apply to Me and You?
What does that mean for me and you? It’s means that if we can find out what the 20% of things are that make us 80% of our income, we can focus our efforts on those tasks, and explode our business earnings. We can maximize our profits by not worrying about the 80% of things that only make us 20% of our income, and only focus on the 20% of the things that make up 80% of our income. We can FOCUS ON THE MONEY MAKERS and limit the TIME WASTERS!
Personally, one of my challenges is that I like to start new projects, which means I get easily distracted and waste a lot of time reading about how to do something new. And while this can increase my bottom line a little bit by diversifying my income across different sources, it also takes up my most precious asset….my time. I tend to spend a lot of time looking at different ways to make money, reading other people blogs for new ideas, and wasting time looking at stats and trying to decide what to do next. While these activities do occasionally lead me to new software or tools that make my business run smoother, most often it results in me just frittering away my time, and only adding a small amount of additional income. It might take 80% of my time, and only result in a 20% increase in my income. For me, these are my TIME WASTERS!
By contrast, I know that there are specific tasks that I do that will almost without fail, increase my revenue, sometimes drastically. For me, these MONEY MAKERS includes creating new products for Zazzle. However, it is also the hardest task for me, because it actually takes concentration and work. First I have to be creative and think up new designs, then make the tedious effort of uploading them to Zazzle, writing boring descriptions, and thinking of appropriate tags before I can publish them. It’s boring. So I probably only do this 20% of my time. But it makes me 80% of my revenue. To be more specific, I ran royalty reports from Zazzle for all of last year, which after opening them in an Excel spreadsheet, and sorting by product types, it showed me that nearly 3/4th of my Zazzle revenue comes from a specific niche. So what I really need to be concentrating on is creating more products in that small niche, because that is where I see most of my revenue.
How can YOU apply to the 80/20 Rule to YOUR Business?
To see how this can apply to you, I encourage you to run some traffic and sales reports from the last year for your business. Is there a specific way of marketing that is producing the most customers? Do you get most of your customers from Facebook? From Twitter? From direct mailing? From Pinterest? Your stats may show you a clear winner! Focus your time on what works for you and your business! And these results will most likely be different for everyone, because everyone has a different product they are selling and a unique customer base. Instead of dividing your time evenly among various marketing avenues, try spending 80% of your time on the one that gives you the most results and only 20% of your time on the ones that only return marginal amounts of new customers or sales.
If you sell products and have different product lines, take a look at your sales reports and tally up how many of each product type you sold. You might be surprised by what you see. Sometimes we think something is a best seller just because we like it, but in reality another product line, one that we never even pay attention to, might actually be the top seller. And don’t just look at the number of sales, but look at the revenue it brings in. You may see a trend that although product line A had 100 Sales, it may have only resulted in $400 income. While product line B had only 50 Sales, but resulted in $600 income. Therefore, Product Line B is a much more profitable item. If you focus your efforts on marketing and selling product line B, you’ll have a higher return on your time.
Cut the Losers, and Expand the Winners
As a small business owner, you only have a certain amount of time and energy. You can maximize your profitability by cutting products and services that drain your most precious resource…your time. Is there a particular product or service you offer in your business that just makes you cringe every time someone requests it? Do you hate having to deal with this product or service because it is time consuming and a pain. Then why are you offering it? If you have a product or service (or customer type) that takes up 80% of your time, but only results in 20% of your revenue, then cut it out of your business. I know what you’re thinking…you think you need that 20% revenue, right? How would you possibly survive without that 20% of revenue. But the question you really need to ask yourself is “How can your business survive when you are giving all your time and effort into this one area that gives you only meager returns?”. You will easily be able to make up the difference in the lost revenue when you get 80% of your time back and can focus it on the other products and services that you offer.
Find your Ideal Customer
Looking at your sales in the past, do you have a specific type of customer that routinely buys from you? A customer who whenever you market to them, they buy? A customer that is easy to work with and they only take a small amount of your time? This type of customer may be a specific gender, people who participate in a certain type of forums, moms, dads, or people who all have a common goal. Look at your customer base and try to find similarities between your best customers. Then focus your efforts on attracting and selling to that type of customer. Design more product types that appeal to that specific customer base. Market your products in places that this particular ideal customer would be. This ideal customer is the easiest to work with and is the most likely to buy from you. This ideal customer probably only takes up 20% of your time. Focus on expanding the type of products or services that this “ideal customer” would buy.
What if my business is too small to see any 80/20 trends yet?
Even if your business is too small to see any significant variation in product type sales or traffic from specific sources, you can still apply this principle by doing a simply log of your activity. For one week (or longer), write down on a piece of paper how you are spending your “work” time. If you only have a few hours in the evening a couple days a week to work on your side business, then this is even more important. If you have committed to working from 7-9 pm, then log everything you did during that timeframe. What you will see is a pattern of activities that are either MONEY MAKERS or TIME WASTERS.
For example, have you ever hopped over to Facebook, really quick, just to check on any updates from your friends, only to finally snap out of it 30 minutes later to realize that you haven’t even started working on your blog post yet? And now you only have an hour and a half of “work” time left. Exactly! Log your activities and time spent. Then make sure you are spending at least 80% of your time on things that make a difference to the bottom line of YOUR business. These MONEY MAKERS are activities that are essential to YOUR business getting new customers or selling products. This may be calling new prospects in your direct marketing business, working on the next chapter of your Kindle ebook, writing a new blog post on your website, creating and posting new products on Zazzle, writing new content for an autoresponder series that your customers receive, or making a new YouTube Video that directly leads to new customers or new sales. Focus on the MONEY MAKERS, and limit the TIME WASTERS! After you have logged your activities, make a column and label each activity as either a money maker or a time waster. The next time you sit down to work, focus on the money makers. You can even use the timer on your phone or a kitchen timer to set specific minutes where you only work on ACTION items.
With all that being said, I know that when you are brand new to something, it will take you longer to accomplish a task, simply because you haven’t mastered that skill. So creating something may actually take a ton of time. This doesn’t mean its a time waster. You will eventually get faster as you get more experienced. As long as it’s an activity that directly results in you making more money, I call it a money maker. I simply consider time wasters to be the things we do in order to procrastinate from starting on the things that we NEED to do!
What time wasters do you struggle with the most in your business? Leave me a comment below!