The year is 1906 and an Italian economist is counting the peas he has grown in his garden. Who knew that over 100 years later this simple action would lead to an undeniable principle that can help all of us shape our profits in the 21st Century?
The name of this gentleman was Vilfredo Pareto, and his research has led to an oft-quoted mantra about cause and effect that you have probably used at least once in your life – the 80/20 rule, or Pareto Principle. It came about when Pareto noted that 80% of the peas in his garden came from 20% of the pods, and so a research project was born to see if that rule held up elsewhere.
It was another learned gentleman that uncovered Pareto’s work and proceeded to flaunt its simplicity and brilliance, cwceph Juran, but it is in recent years that researchers have taken the Pareto Principle to task in order to test whether it is really true or not.
And guess what? The Pareto Principle largely stands up under even the most stringent scrutiny…
Everyone from Xerox to the IDC and even the United Nations have tested the theory, and found that within a tolerance of 5%, the 80/20 rule works just fine across a range of cause and effect scenarios.
Here are a few examples:
• 80% of your profits come from 20% of your customers
• 80% of the World’s GDP is controlled by 20% of the people
• 80% of new business comes from 20% of your existing customer base
• 80% of documents produced by computer systems come from 20% of your IT spend
Let’s focus on those last two examples for a moment.
If you want to make new money in today’s cash-strapped environment, where do you currently look? Do you go out and find new places to do business? Do you move to pastures new and seek opportunities to expand your territory?
Or do you find new business by talking to your existing customers; the very people who already decided to do business with you in the first place?
Pareto suggests that if you focus on the top 20% of those existing clients, you will find 80% of your new revenue opportunities.
What about that document production statistic then? What does that really mean?
If we look at all the documents that are produced by computer systems, it turns out that the majority of them are not letters in Word, spreadsheets in Excel or pretty brochures from Adobe Illustrator. No.
The vast majority of documents produced and delivered in the world are transactional in nature; bills, statements and invoices. And they come from the ERP and financial systems, which make up around 20% of the overall IT budget on average.
So if the majority of output is transactional in nature and already goes to existing clients, and existing clients are where 80% of your new revenue opportunities exist, why aren’t we making better use of these outlets to talk to our customer base?
We can’t answer that question directly here, but thankfully we can tell you how to take advantage of your existing output to generate new revenues, without application or process changes. Sign up for our webinar using the link below, and we'll do what we can to point you in the right direction.
Thanks to Mr. Pareto, his famous peas and 100 years of research into his work, the 80/20 principle stands up. Now is your chance to do the same…