Pareto’s Principle

Pareto’s Principle

 

 

Vilferado Pareto was an Italian economist in the late 1800s. While working at the University of Lausanne, in Switzerland, he noticed that income was unevenly distributed throughout Italy. After researching the issue, he determined that approximately 80 percent of the land in Italy was owned by 20 percent of the people. This led Pareto to investigate other countries where he discovered a similar statistic  80 percent of the wealth was owned by about 20 percent of the people.

 

In the 1940s, a Romanian-born American management consultant by the name of Joseph Juran stumbled across Pareto’s work. After reviewing it, Juran noticed that 80 percent of a business’s problems tended to be caused by 20 percent of the factors. He surmised by focusing on what he called “the vital few” (i.e. the 20 percent) you could increase a business’s efficiency exponentially.

 

He also noticed that 80 percent of total sales was typically produced by only 20 percent of the sales force. He found that by building a reward system that encouraged the 20 percent to perform at max capacity and eliminating some or all of the sales force that didn’t perform would cause revenues to skyrocket.

 

Juran dubbed this anomaly “Pareto’s Principle,” and it was later referred to as the 80/20 rule. Since then, large corporations and small business owners alike have used the 80/20 rule to evaluate many aspects of day-to-day operations.

 

Pareto’s Principle

 

Take the conversation I was having with my buddy, Houston Long. We were talking about how we spend our marketing dollars and Houston pointed out that he get’s 80 percent of his business from 20 percent of his marketing  sound familiar?

 

Houston wondered why we spend so much time, effort and money on the 80 percent of our marketing that doesn’t work instead of focusing all of our energy and resources on the 20 percent that does.

 

That’s a great question. Is it because we’re testing new marketing strategies to help us expand? Or is it because we’re assuming the market will change and render our current best-performing strategies obsolete, thereby allowing one of our more unproductive methods to begin to work?

 

I don’t know the answer to that. But I do know we have many tactics for marketing to potential sellers that has yet to result in a house purchase. And from what Houston, and Juran for that matter, pointed out is we should really hone in on the “vital few” strategies that work the best and eliminate the ones that don’t.

 

As Houston and I got off the phone, I began to think about how the dynamics of the 80/20 rule pertained to the rest of our business. You see, about three years ago, we reached maximum capacity. We do about a deal a month. And thus far, none of the strategies we have implemented have gotten us past that mark.

 

I took a step back and tried to look at things from the outside and asked, “What do we spend 80 percent of our effort on?”

 

It became abundantly clear: 80 percent of our efforts are spent on rehabbing. This means only 20 percent of our efforts are geared toward deal acquisition. From the outside, we look less like a real estate investment company and more like a construction company.

 

Pareto’s Principle

 

After this realization, I can assure you we will be making some big changes. Eighty percent of our efforts will be geared towards finding the deals, not rehabbing them.

 

This leads me to ask you what you spend a majority of your time on. Are you happy with the results?

 

 

If not, I suggest you use Pareto’s Principle to evaluate your circumstances. Find the vital few things you do that produce your best results, and focus the majority of your energy on them. Your future success depends on it.

 

Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.

 

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