Pareto’s Law for your Business.

Pareto’s Law

Vilfredo Pareto was a 19th Century Italian economist and sociologist, known for his application of mathematics to economic analysis and for his theory of the “circulation of elites.” His first work, “Cours d’Economie Politique” (1896-97) included his famous Law of Income Distribution, a complicated mathematical formulation in which he attempted to prove that the distribution of income and wealth in society is not random and that a consistent pattern appears throughout history — in all parts of the world and in all societies. His studies showed that typically, 20% of the population earns 80% of the income and possesses 80% of the wealth.

Today, Pareto’s principle has been expanded into what is commonly referred to as Pareto’s Law or the 80-20 rule. Broadly stated, this important principle says 80% of the results you achieve are produced by 20% of your efforts.

We have learned that Pareto’s law has relevance to many aspects of our lives. Look closely at your own life. It is probable that 20% of your relationships bring you 80% of your joy in your life. Twenty percent of your beliefs may govern 80% of your attitudes, and so on.

Pareto’s law also has relevance to many facets of business. Typically, 20% of your customers will account for 80% of your sales. Twenty percent of your products will account for 80% of your revenues. Twenty percent of your marketing initiatives will yield 80% of your marketing results.
Twenty percent of your employees will perform 80% of the productive work.

What has all this to do with personal productivity? A great deal. Pareto’s Law is one of the single most powerful principles you can apply in your efforts to increase your personal productivity. When applied to the practice of time management, Pareto’s Law produces remarkable results.

Basically, we have just four ways to increase your productivity, i.e., to generate more results in less time:

1. Do more of certain things.
2. Do less of certain things.
3. Start doing something you are not now doing.
4. Stop doing something you are now doing.

First, consider the first two: doing more of certain things and doing less of certain things. Pareto’s Law makes the task of determining what to do more of and what to do less of relatively easy. It involves four steps:

1.   Identify your highest values activities — the 20% of your activities each day that contribute 80% of the value of your work.
2. Identify your lowest values activities — the 80% of your activities each day that contribute little value from your work.
3. Resolve to spend more of your time on your high-value activities.
4. Resolve to delegate or eliminate as many of your low value activities as possible.

Applying the Pareto Principle in this manner will enable you to significantly increase the level of your personal productivity by clarifying your decisions regarding the best use of your time.

Hourly Rate

One easy way to differentiate between your high- and low-value activities is to ask yourself this question: “Would I pay someone my hourly rate to perform this task?” As noted before, a simple rule of thumb to calculate your hourly rate is to divide your annual income by 2,000. If you are
earning $100,000 per year, for example, your hourly rate is $50. A $150,000 annual income translates into a $75 hourly rate.

A few years ago, one of our FocalPoint coaching clients, a young woman in the financial services industry, shared with her coach that she spent two hours each morning delivering donuts to her clients. She explained that this was her way of letting her clients know she cared. Her annual income was $75,000 and her goal was to earn twice as much. When her FocalPoint coach asked whether she would pay someone $37.50 per hour to deliver donuts, she replied, “Of course not! Do you think I’m crazy?” Then she got the significance of his question. Her own hourly rate was
$37.50. In essence, she was paying this amount — to herself — to have her donuts delivered. She decided to hire a student to perform this task each morning and paid him $10.00 an hour. This freed up two hours each day — the equivalent of more than one working day per week
— to devote to her high-value activities. Within ten months, she reached her goal of doubling her income.

You can experience the same impact on your productivity by diligently applying the Pareto principle in your daily work life, focusing more time and energy on your high-value activities and delegating or eliminating as many of your low-value activities as possible.