small business

Pareto Distribution

February 9th 2011
Author -

I have been reading “The Four-Hour Work Week” by Timothy Ferris. I have read a few of these type of lifehacking books lately. “The Art of Non-Conformity” by Chris Guillebeau, “Life Inc” by Douglas Rushkoff, “Small-Mart” by Michael Shuman. They have been very inspirational and good for corporate drones and entrepreneurs alike. I believe corporations like you in your place earning money for them at the expense of your relationships and happiness. But that rant is probably for another day.

Today I wanted to talk about the Pareto Distribution also known as the 80/20 principle.

Pareto was an economist who lived from 1848 to 1923. Pareto's Law is a mathematical formula that he used to demonstrate a predictable distribution of wealth in society. 80% of the wealth and income was produced and possessed by 20% of the population. One example was pea-pods from his garden. 80% of his peas came from 20% of his pods. 80% of company profits come from 20% of its products and customers.

So this morning I wrote a little script in my accounting software to tell me where my money came from. Over the life of my business, who has given me the most money? My distribution was a bit more even than 80/20, but I think my business is young and my business model is lower cost and more volume. But the principles appealed to me and I can understand the argument.

What is your businesses objective? How is your day-to-day work life contributing to this? Are you busy everyday but not heading towards your dream? It might be time to do some analysis and redefine your direction and your daily activities.

I am going to apply the 80/20 principle by identifying my great clients. Who do I work well with, who realises the benefit of my work for their company, and who pays well. I then build an “Ideal Client” profile from these people. My marketing and sales efforts are conditioned by this client profile. Over time I build up a client base of great/ideal people.

This principle can be applied to any aspect of your work life. The hours you work. What work produces the best results for your business? What “busywork” can you get rid of or outsource?

The intention of all these lifehack books is to inspire you to think outside the path set for you. School -> Uni -> 40yrs work -> Retire -> Die. What would really make you and your family happy? Create your own path. My new path started two years ago with the establishment of Waterfall Way Designs. But even this path requires attentiveness and redefinition. Have fun.

Additional Resources.