Every Small Business Owner Should Know The 80/20 Rule

Alternately referred to as the Pareto principle or the law of the vital few, the 80/20 principle is one of the most important concepts in modern entrepreneurship. The term dates back to the 1940s, when the principle was named after pioneering Italian economist Vilfredo Pareto. In brief, the principle states that 80 percent of the effects are derived from 20 percent of the causes. Here are three different ways the 80/20 rule applies to modern-day business practices.

Training Your Staff

Regardless of industry, the success of any for-profit organization depends on the training and talent of its sales staff. To ensure that your sales staff is in the best possible position to succeed, they must receive training that allows them to overcome the objections of potential customers. As noted in this Entrepreneur interview, the best way to meet that objective is to teach your team the 20 percent of the knowledge they'll need to answer 80 percent of consumer inquiries. Using the 80/20 rule, your training program will be compact enough to get new staffers up to speed as quickly as possible.

Pursuing Leads

The most commonly cited example of the 80/20 rule in business is that 80 percent of your company's profits will come from 20 percent of your customer base. In order to maximize your company's profitability, you should pour over your sales data to find what your most lucrative customers have in common. Whether its geography, age or marital status, you will find a commonality among your biggest purchasers, and once you do, you can adjust your marketing strategy to target that specific demographic.

Pruning Your Customer Base

Another important way the 80/20 rule applies to business relates to how a company interacts with its customer base. While first-rate customer service is of vital importance in an era of industry disruption and depersonalized communication, small business owners need to be aware of the fact that some consumers are just bad for business. Typically, these kinds of customers will only represent 10 to 20 percent of your overall base, but they will generate 70 to 80 percent of your support tickets and complaints. They will tie up staff, waste your time and will ceaselessly try to squeeze the profitability out of every purchase they make. In the most respectful manner possible, you need to make it clear that you will no longer be making your services available to these customers, simply because you can't afford to take their business.

This article was written by Mario McKellop via Examiner.com for CBS Small Business Pulse.