When it comes to making successful decisions, especially in running and bootstrapping your business, hindsight is always 20/20. One of the hardest things about making successful decisions, is knowing which decisions to make. Prioritizing your time so that you focus on the most critical elements is among the hardest things that early stage companies can do. That is why that when it comes to making decisions, I’m going to take the position that foresight is 80/20.
The Pareto Principle
The 80/20 concept is not a crystal ball that enhances your 20/20 vision so that you can see in the future with perfect clarity; it is the concept that 20% of your work produces 80% of the results. This phenomenon has been observed and holds true in many situations, such as 20% of your customers generate 80% of your profits, 20% of your employees produce 80% of the value in your company, 80% of your customer’s complaints come from 20% of your customers, or that by making 20% of the decisions your business faces you will have 80% of the success.
This of course is not a hard and fast rule, but chances are if you look at many key metrics in your business, there is definitely a minority creating a majority. Identifying the key metrics where this pattern holds true, especially when the 20% are activities that could be focused on and exploited, is the key to success.
The 80/20 Advantage
Utilizing the 80/20 rule to your advantage is a secret that some of the most successful entrepreneurs use. For example, the most savvy entrepreneur will identify as early on as possible the customer segment that becomes the long-term users—those who gain the most from the product or service and fit well within the business model. This segment provides 80% of the value to the business commonly but represent 20% or less of the customers who try the product. The job of the savvy entrepreneur who is bootstrapping their business is to find the best way to attract and convert more of those customers.
We see so many customers who waste their time and money on the 80% group too often, without focusing enough on exploiting the 20% group. Don’t waste time or money and do your homework. Analyze your most successful endeavors and repeat where possible.