Shark Tank: You know, the bingeable reality show that elevates the business pitch to high drama. Entrepreneurs and inventors pitch their products to a panel of “sharks,” looking for investments, mentoring, and the potential to become a Shark Tank success story.
Every now and then a truly remarkable inventor pitches a genius idea and the sharks attack in order to offer the best deal.
But just as often—no, more often actually—a product falls flat. Typically, either the “great idea” is actually a dud, or, the entrepreneur is.
As a small business owner, author, and speaker, I usually have a sense about which pitches will likely fail: The losing ideas are pitched by an entrepreneur who extols, again and again, their “passion” for the project.
Now, don’t get me wrong. Real passion in an entrepreneur is vital—it means you’re so obsessed with a problem you become a true expert in your field. But knowing the numbers is what helps you actually pay the bills.
If you want to be successful in business, you must become a businessperson, not just a passionate entrepreneur. And that, my friends, means that you must become proficient in the numbers of your business.
The one rule that makes all the difference
While understanding a profit-and-loss statement and being able to apply for a bank loan are essential, let me suggest what is also vital to being a business owner—understanding the 80-20 rule, also known as the Pareto Principle.
The Pareto Principle is all about making the most of your time as a business owner.
It was created by an Italian economist named Vilfredo Pareto who noticed that 80 percent of Italy’s land was owned by 20 percent of the population. Today, it’s now a framework that people apply to multiple parts of life.
In the business realm, the 80-20 rule says that roughly 80 percent of your profits come from 20 percent of your customers. Know who those most valuable 20 percent are and you will be ahead of the game.
Or in other words, 80 percent of your efforts lead to 20 percent of your success. The inverse is also true—20 percent of your efforts contribute to 80 percent of your success. It’s a dynamic relationship.
For small businesses, this is especially key. With limited resources, you have to be extra smart about where you spend your precious time and money.
And yet, while that is a good start, let me go a little deeper on the 80-20 rule.
What you will likely find is that:
- 80 percent of your income comes from 20 percent of your products and services. Which ones are they?
- 80 percent of your website traffic come from 20 percent of your pages. Which pages are they?
- 80 percent of your sales come from 20 percent of your salespeople. What are they doing and are you treating them right?
- 80 percent of your positive customer reviews come from the actions of 20 percent of your staff. Same as above: What are they doing and are you treating them right?
And on and on. The point being, the best small business owners know their companies so well that they know which products, people, and pages generate the most money, and how much money that is. They then double-down on those difference-making, most important numbers and the stories they tell.
Or in other words, they’re passionate—and relentless—about finding the 20(ish) percent of work that leads to most of their success.
How to apply the 80-20 rule to your small business
I first learned of the 80-20 rule at a time when I was creating a lot of content for a lot of clients. Some were big companies with large budgets, others were small nonprofits with almost no budgets. Yet each project took the same amount of work.
It didn’t make sense.
So I did the math and applied the Pareto Principle. I tracked how much time it took me to complete a project and what I was making for each. I also included some qualitative factors, like if they paid me on time and if I actually enjoyed the work.
I realized that the principle was right—an overwhelming percentage of my income came from a small percentage of my corporate clients. They were also the ones I had the best experience with. After that, I reconfigured my business to concentrate on finding and serving those bigger, more lucrative, clients.
And it has made a huge difference. Less work, way more money.
If you want to apply the 80-20 rule to your business, you need to play around with how you spend your time. To start, make a list of the top challenges you currently face. For example, they could be around
- Increasing sales
- Hiring good employees
- Getting paid on time
- Dealing with difficult clients
For each area, look into the efforts that have already been successful. This allows you to pour more time into those things and less into what isn’t working. And most likely, there are things that are working—you just might not see it at first.
Let’s break down the first example through the 80-20 lens.
Using the Pareto Principle to increase sales
Start with a list of your best-selling products or services. This will help you create more opportunities for customers to fall in love with what you’re already doing.
For instance, you could tack on extra services to what people are buying the most of, or offer your most popular products in other variations, with different materials, colors, and sizes. As you focus on creating the best product and experience, your sales will naturally rise.
Here’s how to do it:
Build off your successes
Let’s say you sell ceramic planters in lavender, black, and blue. You know that your small blue planter is your best seller, bringing in 50 percent of total sales. If that’s the case, apply the Pareto Principle to what’s already working at your business—selling those small blue planters.
Offer that blue planter in different sizes or create three versions of the small-sized planter in a similar color palette.
Redistribute your efforts
If there’s a clear winner, you just created a new moneymaker. If not, keep digging into other factors you can play with.
- Look at your site analytics. How are people finding you? How can you get more people from those channels?
- Talk to a few recent customers. What are they using your product for? What else are they considering? How can your product/service satisfy that need?
Then, apply the rule again but focus on a different angle
Experimenting helps reveal new ideas that may contribute to better results. For instance, see if you can lower your product cost by sourcing new materials. Or try advertising on a new channel. The options are endless.
The goal is to continually redefine what your most valuable efforts are and to spend more time doing those things. Talk to customers, dig into your data, and pinpoint what is actually moving your business forward.
And when you learn about the 20 percent that creates your success, it will make you—and our Shark Tank friends—ultra proud.
