ou can agree with me that there’s always so much to do as an early-stage startup, so there’s the possibility of trying to do everything at the same time because they all look important.
This might lead to you working more hours, but the sad truth is that working extra hours is not a guarantee that you will succeed.
Work is always overrated. Especially when you work hard with little results to show.
So how do you handle this situation?
How do you know what exactly you need to focus your attention and resources on as an early-stage startup?
Ever heard of the 80/20 (Pareto) Principle?
What is the Pareto Principle?
Brief Story: The 80/20 Principle also known as the Pareto Principle was discovered by Italian economist Vilfredo Pareto after he observed that 80% of the land in Italy was owned by 20% of the people. Similarly, 20% of people held 80% of the total wealth.
This principle is also known by a few other names like; the 80/20 Rule, the Law of the Vital Few, Power Law Distribution, and the Principle of Factor Sparsity.
The principle states that roughly 80% of the effects come from 20% of the causes in most events. In other words, 80% of the outcome of any activity comes from 20% of the total efforts.
As a Startup, this is designed to help you focus on the 20% of efforts that are directly linked to outcomes that drive sales, revenue and growth.
Examples of the Pareto Principle for business
One main reason why the Pareto Principle is so popular is that it can be applied to multiple aspects of your business.
Here’s how the Pareto Principle can be used in different aspects of your startup:
- It can be assumed that 20% of your employees drive 80% of the output.
- It can mean that 20% of product features are used by 80% of the users.
- It can mean that 20% of your customers account for 80% of complaints.
Why is the Pareto Principle useful?
The Pareto Principle is useful because it allows you to focus your efforts on the areas that bring the most rewards and it can be employed in every aspect of the startup.
For example, salespeople will note that 20% of their accounts bring 80% of their sales. Or marketers will find that 20% of their campaigns generate 80% of their leads and so on.
Adopting an 80/20 mindset
Developing an 80/20 mindset is about trying to achieve more with less. It deals with focusing attention on the key areas of the business that directly have a positive impact on the growth of the business while spending less time on the areas that will only have a very minimal impact.
Using the Pareto Principle as a Founder/Manager
- Focus on your strategy
- Delegate work more efficiently
- Don’t get too stuck on the numbers
- Focus on what matters
Applying the 80/20 Rule
1. Analyze your current revenue distribution.
Ask yourself, where is the majority of your revenue coming from?
What areas of your business have the potential for greater profit, and what areas have underperformed?
2. Focus on adding value.
Once you’ve identified your most valuable and/or scalable customers, put effort into adding as much value as possible to those relationships in order to win their loyalty.
3. Eliminate the dead wood.
This may not sound professional, but getting rid of customers who cost your business more than you gain from them is more common than you may think.
Sprint, for instance, are known to cut loose customers who make an overbearing number of support calls, costing the company more than the monthly fees those customers bring in.
Pros and Cons of the Pareto Principle
- Gives perspective on how to grow the company.
- Helps you to focus on the most important things
- Provide a framework for rewarding loyal customers/employee
- This can leave some employees/customers feeling left behind
- Requires a discerning eye
- Might negatively skew your idea of what drives value
A Final Note on the 80/20 Rule
Always focus on and do the right things that move the needle for your start-up.
Remember that what works for others might not work for you.
However, once you know what works for your startup, focus on what works and work tirelessly to accomplish your goals.
Do what it takes to make your startup a success.