As an ecommerce merchant, you must focus your limited time and energy on the areas of your business producing the most.
To do this, you can abide by a single rule—developed by an Italian economist and sociologist named Vilfredo Pareto—that centers around the relationship between actions and consequences. Commonly known as the 80/20 rule, or the Pareto principle, it has many applications, including in economics and business.
Used correctly, the Pareto principle can help you identify tasks with the most impact in your life and your business.
What is the 80/20 rule?
The Pareto principle states that roughly 80% of results come from only 20% of causes. In a retail context, for example, a business owner might find 80% of their sales come from just 20% of their customers.
Developed in the late 19th century by Italian economist Vilfredo Pareto, the concept was derived from an observation about Italy's land and wealth distribution. Pareto noticed a minority of the population owned most of the land. This pattern could be graphed (the result is now known as a Pareto distribution), and its shape recurs in many areas of life. For instance, Pareto applied his observation to gardening, finding about 80% of his peas came from roughly 20% of his pea plants.
Outside of economics, Pareto's observation can apply to daily life and work in areas where you notice an exaggerated relationship between causes and consequences. The Pareto principle helps business owners direct their attention toward tasks, leads, and opportunities that are most likely to prove lucrative.
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Misinterpretations of the 80/20 rule
Although the Pareto principle is a useful framework for analyzing inputs and outputs, there are a couple of common misinterpretations.
The Pareto principle is not a mathematical law
The Pareto principle is a general observation. The idea is to highlight the potential unequal distribution between efforts and results, but it does not apply to every situation. Even though this observation identifies broad patterns, in some situations the same amount of effort leads to similar results. In other words, 80% of inputs can produce 80% of outputs.
The Pareto principle also isn’t limited to the specific percentages of 20% inputs and 80% outputs. The numbers do not need to add up to 100% for the principle to apply. For example, if you notice 60% of your online traffic is on webpages for only 30% of your products, this still represents the Pareto principle.
The Pareto principle is not designed to reduce workloads
Another misconception is the Pareto principle means you can focus on only 20% of a company or a project and pay little attention to the other 80% without any undesirable consequences.
Although the 80/20 rule is a framework designed to help you stay focused on the aspects of your business with the most impact, you still need to spend time on other tasks to keep your company running smoothly. Minor details creating the least amount of impact on your company can still result in problems if ignored.
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How to use the 80/20 rule
Here are a few key areas where you can apply the Pareto principle to optimize your business operations:
Decision-making
Consider applying the Pareto principle to your company’s decision-making processes by identifying decisions with the least amount of impact on your company, and those with the most. This process is known as Pareto analysis: You create a chart of potential decisions, estimate the benefit of each, and prioritize those for which the least effort generates the best results.
Prioritize making informed decisions around areas that you know will make a difference to your customers. For example, an ecommerce cosmetics brand could use the Pareto principle to recognize that a relatively small percentage of customers generate a majority of sales with impulse purchases on their smartphones. With this information, the merchant could put more resources into optimizing their ecommerce store and checkout flow for mobile users.
Marketing
The Pareto principle also applies to marketing in situations where a limited number of marketing campaigns generate most of the results. For example, a marketing manager who notices most of their ecommerce traffic comes from a relatively small number of inbound marketing campaigns could focus their entire team on developing more search engine optimization (SEO) or email marketing strategies.
Using Pareto’s principle as a guideline for your marketing efforts can help you spend more time and attention on the strategies yielding the best results. With various marketing tools available, knowing more about which strategies work for your target audience is vital information when choosing the key tools for your company.
Customer service
Apply the 80/20 rule to your customer service process by evaluating data from your customer interactions and feedback, and looking for patterns. Do specific problems keep coming up? Are multiple issues being generated by the same source?
For example, if you notice a majority of customer complaints relate to the same product defects, you could focus on fixing production problems by implementing a more effective quality controlprocess. In this case, the Pareto principle can help you develop a prioritization process to deal with the most important customer service issues first.
Productivity
The Pareto principle can be a helpful framework for increasing productivity and developing time management skills. You could write out a task list including everything you need to do, rank each of those tasks on a scale from one to 10 based on their importance and impact on your business, and prioritize the most vital 20%.
Although you still need to complete the rest of the tasks on your list, the 80/20 rule can help you determine which to do first. For example, someone starting their own ecommerce business could list all of their tasks and prioritize the roughly 20% they believe will produce the biggest payoff, like writing a business plan or creating an ecommerce store through an ecommerce platform like Shopify.
80/20 rule FAQ
How does the 80/20 rule apply for work?
You can apply the Pareto principle to maximize your work productivity by prioritizing roughly 20% of the tasks that produce the most output for your company.
How does the 80/20 rule work with money?
An example of the 80/20 rule with money is creating a budget where roughly 80% of your personal income goes toward life expenses and 20% is for savings dedicated to an essential long-term goal like retirement or a down payment on a house.
Where does the 80/20 rule come from?
The 80/20 rule comes from the work of late-19th-century Italian sociologist and economist Vilfredo Pareto. Pareto observed an unequal distribution of Italy’s land and wealth, with roughly 20% of the population owning roughly 80% of the land. Pareto also noticed this principle at work in his garden with 20% of his pea plants producing 80% of the harvest.
What is an example of the 80/20 rule?
An example of this rule in ecommerce would be if roughly 80% of your sales were generated by roughly 20% of your customers. In this case, you could focus on the smaller audience that yields the most revenue and spend time developing retargeting marketing campaigns for those loyal customers.