Many of us are not familiar with the name Vilfredo Pareto, although we know of his work. Pareto, an Italian economist, plied his trade from the late 1800s until his passing in 1923. He came upon the principle or rule which bears his name when he noticed that 20% of the world’s population earn 80% of its income. Further investigation found that this 80/20 principle held across many areas of economics: for example, 80% of the privately held real estate belonged to 20% of the populace; 80% of the peas in Pareto’s garden came from 20% of the pea pods. Thus, Pareto’s Law was born. Most of us know this Law by its more common moniker, the 80/20 Rule.
Pareto himself was not without controversy. Mussolini believed that Pareto’s Law, or the 80/20 Rule, supported the establishment of fascism. Nonetheless, modern thought leaders find the 80/20 principle to be ubiquitous in analyzing many business structures operating in market-driven economies. For purposes of applying this principle to the small entrepreneur, any political or policy discussion will be set aside. Much like the theories of Einstein can be used to understand the harmonies of our universe or to create horrific nuclear-powered weaponry, the Pareto principle is extremely helpful in its most benign form — helping the small entrepreneur succeed.
In its most raw incarnation, the 80/20 principle is a concept of leverage. For the small entrepreneur to make a go of it, she must be incredibly efficient. The big boys — the Fortune 500 companies and even the midsize firms — can out research, outspend, and out staff every small business. The smaller player must use every advantage and trick in the book to carve out a profitable niche.
One advantage that the entrepreneur may have over the bigger company is that her entire staff — usually herself, if this is a solo entrepreneur situation — is incredibly motivated to bring in business. As we all know, motivation levels can vary in a firm that employs 3632 workers. But the very advantage our small player enjoys can sometimes work to her detriment.
The mantra of the small entrepreneur is “get business, get business, get business.” The problem is that in our businessmanʼs eagerness to seek revenue, he sometimes forgets to be selective about the type of clientele that is being attracted. What the 80/20 rule teaches us is that 20% of the clientele of the average business is an inappropriate match to that company. Indeed, the small entrepreneur will find that 20% of his clients take up 80% of his time. Or, 20% of his revenues come from clients that take 80% of his time. Either way, what is occurring here is a mismatch between company and client.
Perhaps the client is high maintenance, is seeking a service that is not efficiently provided by the entrepreneur, or is one that the entrepreneur is treating as a “loss leader” in hopes of securing a bigger deal. In any case, oftentimes the better approach is to understand addition by subtraction. If the small entrepreneur fires some of his clients, or declines to work with them in the first place, what actually happens, through the efficiencies of time, is that our businessman winds up making more money in the long run. Are you running a business or chasing dollars?
Please understand that the suggestion to fire or decline clients makes no value judgment upon the person or business that is seeking your product or service. Sometimes this rule can be hard to implement because you genuinely enjoy your interactions with the mismatched client. Weʼre not saying these clients are “bad” in some way; weʼre simply saying they are better served elsewhere. Isnʼt this capitalism in its most pure form? Allow a customer or client to pursue a product or service where is most efficiently provided.
Again, like all of our mutable laws, you can create whatever exceptions work best for you. Perhaps you serve a client because heʼs a relative. Perhaps sheʼs a childhood chum. Or perhaps he is someone that has become more friend than client over the years, and you enjoy your interactions with him, despite the fact that itʼs not an economically beneficial relationship anymore. The beauty of being a small entrepreneur is you get to choose with whom you work. And isnʼt that freedom part of the American Dream in its pure form as well?!