According to the Pareto principle, 20% of the products, services, features, you name it, generates 80% of the business. I’ve seen this principle play out in big corporations with 400+ brands and I witnessed it inside small businesses alike. So, why not focus more on the chunk that has the biggest impact?
While pursuing my corporate career I noticed an interesting phenomenon that was playing out especially during Christmas. The other holiday seasons like Easter or Halloween were put on a different production and delivery plan (schedule), however, when it came to Christmas and New Years Eve, major shifts were taking place in order to ensure full shelves in stores. One global company I worked for went as far as stopping all production lines for three weeks and going full throttle on six brands that were responsible for roughly 85-90% of the revenue.
After leaving the corporate world and joining the entrepreneurial land, I discovered something rather peculiar in the realm of small businesses. Instead of focusing on the products and services that were generating the Pareto part of the equation, the vast majority of small businesses I was interacting with, either didn’t know their numbers or didn’t want to face reality and cut down on the portfolio when times required so.
To Deploy Pareto You Need to Know Your Numbers and Be Willing to Take Bold Decisions
The corporate world loves numbers. Employees across the company’s departments are asked to provide their bosses with all kinds of stats and analytics which in a best case scenario is later used to develop future strategies and double down on the tactics that have proven to work. Obviously, this is rather a ‘dream scenario’ as reality looks shamelessly different; but that’s a topic for another day.
The vast majority of small businesses operate very differently for various reasons such as for example size, money, market share etc. What happens in a small business is clearly reflected in the thinking pattern of its owner and the actions / non-actions the entity is performing.
If the founder or CEO doesn’t shy away from digging into the numbers, understanding causalities and being committed to building a generational business, he / she will definitely have a solid framework that will allow him/ her to take bold decisions.
What speaks for small businesses is the ability to implement decisions fast, adapt quickly if things go wrong and readjust the course on the go. No need for well-known corporate time suckers such as board meetings or conflicting ego personalities who are stuck in their own world and mostly unwilling to cooperate for the greater good. Therefore, small businesses are well advised to maximize on one of their core advantages which is flexibility.
Here are a sample of questions you should have the answers ready for:
- What products or services are generating 80% and more of your business?
- How many of them are we talking about? Most likely it will be a handful of products / services.
- Do you have a seasonal business? How is this reflected in the Pareto system?
Recently I talked to a farmer who is offering his fresh produce on the local market. He also started an online shop to cater for the needs of a younger generation looking for healthy produce in their approximate neighborhood.
While going through his portfolio, I noticed a lot of discrepancies. This is when I started asking him the questions I listed above. His answers came as a surprise even to him personally. He never contemplated on this issue as he was so deeply entrenched in the day-to-day business that he didn’t take the necessary time to sit back and analyze his current business situation.
Roughly 85% of his revenue came from an organic juice and a 200gr pack of sweets coated with dark chocolate. The rest of his portfolio made off of gems, organic home-made pastas as well as fresh and dry fruits made 15% of the revenue pie. The most peculiar thing in this entire situation though was the size of his fan shop. Online he was offering a dozen t-shirts, teddy bears, mugs etc. that added no value to his business rather than raising a little bit of awareness for his brand and more importantly, confusing all those who visited his website.
After having a chat and highlighting one of the core principles in sales, namely, that a confused mind doesn’t buy, he got rid of the vast majority of his fan shop and doubled down on the two products that have the highest impact on his business. He did it by adding different sized baskets comprised of these two articles and special bundles to his portfolio.
It’s a Numbers Game, or Maybe Not?
You need to know your numbers if you want to have a solid business. There’s no way around this. Deciding solely based on emotions, experience and knowledge without even looking into the numbers is straight-out dumb.
I’m not a fan of deciding based on Excel-sheets. I’m a fan of using a combination of all the above-mentioned including a generous amount of intuition to propel the outcomes of a business in terms of revenue as well as from a marketing and branding perspective.
Having a deeper look into the 80% is extremely important as there lie future cash cows and niche products / services that one day you could easily turn into the driving forces of your business. Ignoring them is foolish and definitely not intended while implementing Pareto.
Sometimes the 80% products/services are the ones who attract new users, show a diversified portfolio that signals potential for growth in other markets (both vertical and horizontal) and portray a sophisticated entity that has serious longterm business intentions.
The idea behind Pareto is to know your business in and out. You have to know how each slice of the pie tastes in order to replace the ones that have gone sour and every now and then, find and add that amazing cherry slice that supports growth and scalability.