The previous 'dirt-world' retail business I managed had a large turnover, a very high profit, and less than 100 lines. Early in 2001, I was contracted to manage another business. This one carries over 800 different lines, yet has a turnover of only about a sixth of
other business, and a lower profit margin. They both have a comparable amount of traffic and credibility in market, so how can it be that results are so different?The explanation starts with Vilfredo Pareto, an Italian economist and political sociologist who lived from 1848 to 1923. He devised law of 'trivial many and critical few', better known as Pareto's Law, or 80:20 rule. This rule says that, in many business activities, 80% of potential value can be achieved from just 20% of effort, and that one can spend remaining 80% of effort for relatively little return.
Old Vilfredo might have lived a century ago, but he was spot on. I've been in business a long time, and I can confirm almost universal truth of 80:20 rule, in many forms.
- When Sales Manager of a Realty office, I had 19 sales staff working to me. About 85% of business was written by four top staff.
- In a Consumer Electrical business I owned, around 75% of turnover came from the best-selling 20% of stock.
- In an eco-tourism business I now manage, there are almost 40 Departments of stock. One department alone produces over 25% of profit; next five departments produce next quarter of profit; next seven another quarter, and next twenty-five or so together only produce last quarter of profit.
The 80:20 Rule applies in almost every sphere. It's uncanny. In almost any field, 20% of resources produce 80% of result. It's vital to understand that reverse is also true- things that take up 80% of your time and resources, will only produce 20% of your results.
