How the 80/20 rule helps small businesses

How the 80/20 rule helps small businesses

Wil Chan
By Wil Chan
Apr 18, 2023
8 min read

April Wilkerson isn’t just a woodworking star on her Youtube channel, where she shows her 1.5 million subscribers how to do everything from pick up a power drill to build a tiny house. 

Since 2022, she’s co-hosted home improvement TV shows like History Channel’s More Power and Assembly Required, and Roku’s This Old House Makers Channel, making her one of the biggest names in the DIY world today.

But scaling her passion project into a successful small business required a big mindset shift — and Wilkerson credits the 80/20 principle. That’s the idea that 20% of your input leads to 80% of your results — and it was “one of the best pieces of advice I’ve received as a business owner.”

When you’re just starting a small business, “You’re just in build mode, and you’re taking anything that will come your way,” Wilkerson says. But “there comes a point in your growth where you need to stop and evaluate: What is actually bringing in the profit? And when I took the time to do that, it completely changed my business.”

The 80/20 principle is rooted in the work of Italian economist Vilfredo Pareto, who in 1896 observed a “universal” pattern across countries: 80% of the land was owned by 20% of the population. That inspired the modern business concept called “the Pareto Principle,” proposed by management expert Joseph Juran in 1937: that in any kind of company, just a small handful of factors create the vast majority of outcomes.

Since then, the 80/20 principle has been tested and sharpened by generations of entrepreneurs and experts. 

We spoke to leading 80/20 practitioners about why this concept is so useful — and how you can use it to grow and protect your small business. 

What’s most important to your small business?

David Philippi, the CEO of Chicago-based management consultancy Strategex, has been coaching businesses on practicing the 80/20 principle for decades. 

At the core, it’s simple, he says: “Find out what's most important in your business, and focus on that to the exclusion of all the noise.”

The classic 80/20 example is the idea that 20% of your business’ customers are responsible for 80% of your revenue. Many businesses realize this, but “they never take it far enough,” Philippi says. “The reality is, you make all your money — and then some — with your few large customers, and you actually lose money with your many small customers.”

Philippi first saw this while working at an Illinois cable connector maker in the early 2000s, where he discovered a quarter of the customers were responsible for 89% of its revenue. The bottom half of its customers? Just 4% of the revenue. 

“There’s no way,” he remembers thinking. But in the decades since then, “when we run the numbers with the hundreds of customers we work with at Strategex, it always breaks out that way.”

For Clint Murphy, a real estate company CFO, executive coach and content creator, the 80/20 principle helps him ask: “What is my highest and best use? What is my zone of genius? That’s where I want to spend my time, because it adds the most value.”

Murphy first realized the power of the 80/20 principle as a finance officer, where the owners of his company were spending a lot of time reviewing invoices.

He ran an analysis: how few invoices could still convey a picture of most expenses? The results were impressive: “They could get comfortable with 80% of the spend looking at just 15-20% of the invoices.”

Now, Murphy practices the 80/20 principle to grow his content business

For example, he tweets every day to his 280,000 Twitter followers, and engages with his friends’ posts so they feel valued. 

“But when I’m done and press publish, I don’t need to stay on the platform; I get off,” he says. “And that’s going to get me the maximum value in the shortest timeframe possible.”

Early decisions have the most impact

Lyndley Kent is an associate principal at Neumann Monson Architects, where she’s helped design everything from small-tenant offices to large residential towers in Iowa. 

Kent uses the 80/20 principle to explain to her clients that 80% of the outcome is determined by the first 20% of the design process.

“We have to understand what their goal is, so that we can set up those big-impact changes or design elements early, so that they're not going to come back later on and have to change 15 different things that are going to end up being costly to update,” she says. 

Recently, Kent’s team worked on a Living Building Challenge project to build a beautiful, environmentally sustainable headquarters for a global nonprofit. One of the key features of the building was a central courtyard which would serve multiple functions. “That had an impact on so many different things that if it was discovered that we needed to add that later on, it would have totally stopped everybody in their tracks,” she says. 

The takeaway? Plan ahead, especially when working with clients who haven’t been through the process before, Kent says. “So we guide them through that process through different visioning exercises, programming exercises, and goal-setting.”

Your most common risks come from just a few threats

Andrew Sheves is an international risk and crisis management consultant who advises governments and companies operating in difficult environments. And in more than three decades of work, he’s seen the 80/20 pattern appear again and again. 

“A significant majority of your risks will come from a small number of scenarios,” he says. “You may notice that one type of threat has significant effects across your organization, well in excess of the other threats you are facing.”

Likewise, most of the possible impacts tend to threaten just a small part of your operation, Sheves says. “For example, workforce disputes, flooding, and fuel shortages will all affect your ability to distribute your finished goods. So even though there's a range of threats, these all affect one part of your distribution chain.”

That’s why practicing the 80/20 rule means assessing your small business risks, so you can understand the setbacks your small business is most likely to face. 

But you can’t spend all your time worrying — the 80/20 principle can help you guard against those risks most effectively. Sheves says having good business insurance coverage is an example of 80/20 in action: “It's one measure that gives you the backstop you need to recover from a range of loss-making events.”

The 80/20 rule is an ongoing process

For successful small business owners and entrepreneurs, the 80/20 principle isn’t just something you apply once — but repeatedly. 

“For us, 80/20 is a never-ending journey, in that there's always going to be a new 20, a new something that's most important,” says Strategex’s Philippi. “It's not a simple recipe book that you follow step by step; it's not paint-by-numbers. It's really understanding what drives the business.”

Murphy, the CFO and content creator, says he likes to experiment by pushing the 80/20 rule further each time. If a business owner could review 80% of their expenses with just 20% of the invoices, “Why don’t we take it further? What if we take 20% of that? Now you’re only getting about 65% of the coverage, but you’re only looking at 4% of the invoices.”

But it also applies to everyday life. Murphy is a fitness enthusiast, and “everyone always wants that complicated plan,” he says. “But for most of us, all we need to be healthier is to sleep more, drink water, eat more vegetables, and go for a walk. The more we can boil things down to the basics, the easier it is.”

NEXT makes protecting your business easy

We know you want to focus your time on what matters: growing your business. That’s why we’re on a mission to make it easy to find and purchase the coverage you need to protect yourself and your employees. 

Our platform offers flexible, no-hassle business insurance: You can get a quote, compare options and get your certificate of insurance online with NEXT in less than 10 minutes. And if you need to learn more, our online resources and licensed advisors are ready to help.

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How the 80/20 rule helps small businesses

END

Wil Chan
About the author

Wil Chan is a content writer at NEXT and has been a professional writer for more than ten years. His work has been featured in publications including Forbes and Greatist. He has run a freelance business since 2016 and feels passionate about helping self-employed people in all industries succeed.

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