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Apply Pareto's Principle to move the needle of your startup

Posted by Ian Brookes on 10/04/17 06:43

Vilfredo Pareto was a philosopher, economist and academic, fascinated by social and political statistics and trends. Legend has it that one day he noticed that 20% of the pea plants in his garden generated 80% of the healthy peapods.

He took this observation into a study about wealth and income, and discovered that 80% of the land in Italy was owned by 20% of the population. He investigated different industries and found that 80% of production typically came from just 20% of the companies, publishing a paper, Cours d'économie politique.

Sadly Pareto didn't live to see the general appreciation and wide adoption of his principle, and it was left to Joseph Juran to suggest The Pareto Principle or the 80/20 rule, the law of the vital few, that states that for many events, roughly 80% of the effects come from 20% of the causes - a small minority will have a disproportionate impact, generating a disproportionate share of results.

Whilst there is nothing special about the number 80% mathematically, many natural phenomena have been shown empirically to exhibit such a distribution. I have 20 rooms in my house, but I spend about 80% of my time in just my bedroom, family room, kitchen and office (exactly 20%). On my iPhone, I have 30 different mobile apps pinned to the tiles, but 80% of the time I’m only using the six (20%) on my home screen.

When I go food shopping, I definitely spend the most time in the aisles that are around the edges of the store: fruit and veg, the fish stall, dairy, breads — and generally skip the aisles in the middle of the store (except for health and beauty, obviously). When I socialise, 80% of my time is spent with the same 20% of my friends. In perfect accordance with the Pareto Law, 80% of the people reading this blog will gloss over it and be on their way, but 20% will stop, reflect and take action.

Application of this universal rule also applies to the odds of success: your odds of winning go up to 80% when you achieve the 20% that give you the most results. That is great odds. Intuitively, we know this to be true, but very few people truly understand how far this principle extends into business, and it’s especially useful when launching a startup.

In research into the productivity habits of high achieving entrepreneurs, handling every task that gets thrown their way - or even every task that they would like to handle - is impossible. They use Pareto to help determine what is of vital importance, delegate the rest, or simply let go.

So how can you apply Pareto’s principle to gain more time in your startup life?

You’re faced with the constant challenge of limited resources. It’s not just your time you need to maximise, but your entire team’s capacity. Instead of trying to do the impossible, a Pareto approach is to truly understand which projects and activities are most important, and which specific tasks you need to focus on.

The temptation is always to try the new and exciting. There’s nothing inherently wrong with that, but a Pareto analysis and an 80/20 mindset helps you to stay focused on your strategic plan and execution, and spend less time chasing endless new opportunities, which can be distracting and are often the cause of entrepreneurs losing their way.

No matter what your situation, it’s important to remember that there are only so many minutes in an hour, hours in a day, and days in a week. Pareto can help you to see this is a good thing, otherwise, you’d be a slave to a never-ending list of things to do. It helps your efficiency knowing that 80% of the outputs are the result of 20% of the inputs.

The 80/20 rule is also divisible, meaning that it is also true that 20% of 20% of the inputs (4%) generate 80% of 80% of the outputs (64%), and so on. While the 80/20 dynamic is powerful enough, it only gets more lopsided as it progresses. Consider, for instance, that with only three steps you arrive at 0.16% of inputs being responsible for an astonishing 41% of output.

The simple takeaway is this: Stop beating your head against the wall on working harder and putting in longer hours. Most of what you’re spending time doing doesn’t matter.

Startup ventures are a bit harder to accept this thinking, and the 80/20 can appear paradoxical. We are predicting the future not measuring the past, so our thinking is to do everything because we can’t really decide what is important. Often I see exhausted entrepreneurs walking around wearing burnout as a badge of startup life.

This needn’t be the reality. The opportunity cost of doing the 80% is often not doing the 20% of what really matters. Once you internalise this you’ll focus on predicting the 20% instead of trying to get everything done, and always feeling you’re living on a hamster wheel and constantly behind.

So, what 20% of your work drives 80% of your outcomes? For example,

  • 20% of my leads result in 80% of my sales
  • 20% of my social connections do 80% of the sharing
  • 20% of my referral sources refer 80% of my leads
  • 20% of customers account for 80% of total sales
  • 20% of the reported software bugs cause 80% of software crashes
  • 20% of my clients soak up 80% of my time - 80% of the people who are ‘interested’ never buy

It is time to set some priorities, a focused intensity on work that matters. Ignore the numbers for a moment and understand the concept: a minority of efforts lead to a majority of good results. The 80/20 rule supplants the long established ‘work more’ mindset mantra of a startup. We should stop the wasted effort and focus on investing in the paths yielding the most sizable returns.

Startups adopting the 80/20 principle work in a precise and predetermined manner, analysing their results at fixed intervals in a data driven approach to startup strategy execution. Focus intently on the work plan by limiting distractions. If the effort does not yield significant results, change the work plan.

Results should be viewed both in a short-term and long-term perspective. In this way, startups should work to first applying the 80/20 rule by initially focusing the majority of work towards accomplishing short-term immediate goals. Correspondingly, minimal work output should initially be allocated to long-term goals.

Often, startups are an all-or-nothing proposition. It either works out or it doesn’t. In my view, the Pareto Principle for startups is actually that 20% of the initial work input is responsible for 80% of the first steps of success, and in this way no single decision matters, it’s good decision-making overall over many decisions matter.

In a startup the rate of decision-making is high, and staying on plan may not be the right thing to do. Some structure helps, but it is easy for it to become stifling, so 20% work becomes about doing the right things, as opposed to doing a lot of things. Working more hours does not necessarily increase the likelihood that your startup will succeed.

In fact, it may decrease it if it makes your thinking narrow and cloud your judgment. You may be too focused on breadth of work and not depth of work. For example, consider a startup which persists in directing its activities equally across its entire product range when perhaps 80% of customer traction derives from just 20% of the products. By discovering these statistics, the decision-making would clearly signpost where to direct your efforts, and probably that some products that could be discontinued.

So, here’s my Pareto Platform to you get started on a 20% focus:

* Develop a basic model of your key activities, the things you know that when combined and lined up, with focus, create success.

* Identify the pivots/conversion points within that model, the things you must get right at all costs

* Put in place metrics that give you a sense of what is happening right now

* Identify the levers within those conversion points you can influence to get to significantly better results

* Make small tweaks - pull the levers - and see what happens, and track results over time

These are the principles I adopt whenever facing overwhelming workload or a set of apparent priorities from different projects. It’s a return-to-basics call that gives clarity.

Taking a longer-term perspective, the Pareto Principle offers equally good insights to guide startup thinking and doing:

Focus on 20% of your market It is possible to have a successful business that either focuses on a niche market and mass sells into it, or just a segment of an overall market. Your target isn’t the market, but identify a demographic and define your addressable market with precision to ensure you have discipline, clarity and focus on your customer development.

Scale your pricing Is your pricing scalable? Many startups sell direct to end customers - by necessity - in their early stages, only to subsequently realise that margins can’t accommodate resellers and distributors when considering new channels. Test your assumptions and do your homework before setting pricing, look at 20% customer price bands and test elasticity of demand.

Less is more Is a national market automatically better? No. Uncontrolled demand driven scaling leads to all manner of headaches and cost-bleeding, Price erosion to support volume customers is almost always irreversible. Avoid this scenario and consider partnering using exclusivity to negotiate better terms and focus on the 20% of customers available.

Hyperactivity vs. Productivity Being busy is not the same as being productive. Forget about the start-up overwork ethic that people wear as a badge of honour, you don’t scale! Get analytical and stay analytical, use 80/20 principles to stop putting out fires, duplicate your few strong areas instead of fixing all of your weaknesses

Work with ideal customers Not all customers are created equal. Apply the 80/20 principle to time consumption: what 20% of people are consuming 80% of your time? Put high-maintenance, low-profit customers on autopilot, process orders but don’t pursue them or check up on them, and exit high-maintenance, high-profit customers – the money isn’t worth the effort.

Get intimate Likelihood is that 80% of your new customers result from 20% of your offerings. Therefore identify which offerings produces most new customers, and then use the identified offerings more often (and use the less-effective offerings less often, or not at all). Get intimate with your offerings, and focus on the 20% that your customers want.

Everyone wears several hats in a startup, with overloaded schedules and too much to do. We think ‘I’m busy and therefore being productive’, but getting stuff done does not have a linear relationship to doing the stuff that makes a difference.

You already have all the time you’re going to get, and the law of diminishing returns applies – time is a bandit, and we often use extraordinary effort to keep things moving forward, but this is simply not sustainable. Management by crisis and fire fighting can become the norm, but are hugely unproductive and energy sapping. Urgency itself is not the problem.

The Pareto Principle enables a startup founder to work ‘on’ the business, not just ‘in’ the business, providing visibility for thinking time and space to focus on priorities, working with the team to do the stuff that makes a difference. The reality is most of what we do doesn’t matter, so we need to change this and focus on the 20% that moves the needle.

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