If you consider yourself a “productivity geek” (like me), then chances are you’ve come across the “80/20 principle” at one time or another.
The 80/20 principle, also known as Pareto’s Principle, was named after the Italian economist Vilfredo Pareto. The principle states that 20% of input or effort generates roughly 80% of your output or results.
The 80/20 principle was popularised by Tim Ferriss in his book, The 4-Hour Workweek. In the book, Tim discusses how he applied the 80/20 principle to all areas of his business including clients and advertising spend.
It’s a concept that most of us have heard of.
In simple terms it means you need to find and focus on the 20% of actions or things you can do that will result in 80% (or more) of your desired result.
- In business – Focus on the 20% of customers or clients that deliver 80% of your revenue.
- In languages – Learn the 20% of phrases or vocabulary that are most frequently used so you can have a fluent conversation with as few words as possible.
- In life – Try and find the 20% of things you can do that have an 80% or more impact on your happiness. Or, identify the 20% of people or things contributing to 80% or more of your stress and anxiety.
It’s easy to think about this concept. But actually applying it to real-world situations is a whole other issue.
A few months ago, I was trying to think about how the 80/20 principle applied to my consulting clients. Does 80% of revenue really come from just 20% of clients? I decided to put this hypothesis to the test.
- Because I record every client I work with in Pipedrive (affiliate link), I have a complete history of every single sale I’ve ever made. Obviously, you can’t begin to do any analysis if you don’t have any data to work with. This is why it’s so important to track things like your sales and time.
- I exported every single “Won deal” (sale) from my account into Excel. The export produces a lot of data, but the only metric I was interested in is “deal value” i.e. sale amount.
- I sorted my spreadsheet by value with the highest value deals at the top.
- Next to the deal value column, I created a column called “Cumulative Sales”. The math is pretty simple. I simply added together the latest deal with the combined total of all previous deals, like this:
- I also added a “Percentage of Total” column, which compared the cumulative total to the value of all deals, like this:
- This allowed me to work out the COUNT of deals that made up the top 80% based on sales. And this, in turn, allowed me to create a summary, like this:
As you can see, in my case, it’s not quite 80/20. More like 80/40. Or in other words:
“80% of sales come from the top 40% of deals”
Here are my main takeaways from the experiment:
You might think that the sensible thing to do is to take a 20% income reduction and benefit from 60% less work. However, the tricky thing in my line of work is that it’s not always clear if a client is a top 40 or bottom 60 when you first meet them.
What I can learn from this is to not sweat over the little stuff and put effort into chasing small clients.
The other thing I have done with this information is to use the average deal size of the top 40% as a benchmark to prioritise clients and set prices. As you can see, the average deal size of the top 40% is over $1,700. So if I want to be more productive with my time, I need to find and charge clients this sort of price (or higher). Anything less than this is falling into the bottom 60% and deserves less of my time.
This was a really useful exercise to go through and it was pretty fun to take a cool concept and actually apply it to the real world.
Have you ever applied the 80/20 principle like this? I’d love to hear if anyone has tracked and analysed their time in the same way. Let me know in the comments below!