Monday, November 8, 2010

Pareto's 80/20 Principle in Marketing

I'm a huge fan of the Pareto principle, aka the 80/20 Rule.

Briefly defined, it's this: a minority of causes usually leads to a majority of results.

There are exceptions, of course, which is why I inserted "usually" into the definition.

Still, the 80/20 Rule works often enough that you can achieve huge breakthroughs by applying it to your business.

Example: I used the 80/20 Rule to build an entire business on one Google Adwords ad and one keyword. Let me explain ...

A few years back, I was running a range of pay-per-click ads on Google, driving traffic to merchant's web sites and earning a commission on each lead that I provided them.

Each week, I analyzed my profits. One Saturday morning, I found that one ad and one keyword, part of hundreds I was running Google, was especially profitable.

So, I focused my efforts on testing and improving that ad and keyword. Profits went up.

Then, I replicated that winning ad, using other keywords. Profits went up again.

Then, I restructured my working days, dropping almost everything to focus on that one money-making activity -- improving my Google Adwords in that one area. Profits skyrocketed.

Within 6 months, I was bringing in more than $450,000 a year in net profits. And this went on for nearly three years.

Success came for me, as it can come for you, when I took three steps in my marketing:

1) identify the small number of activities producing a large percentage of profits;
2) spend more time on those high-profit activities;
3) spend less time on other low-value activities.

That's it.

The book to read on this subject is The 80/20 Principle, by Richard Koch.

It's so good, I've read it three times.

And, yes, there's a lesson in that, too: Probably 80% of the books in your library are so-so. It's far better to read a few excellent books several times, than to read many crappy books once, IMHO.

To finish this rant, here are excerpts I wrote out by hand after my second reading of The 80/20 Principle ...
  • To engage in 80/20 Thinking, continually ask: What is the 20% that is leading to the 80%?
  • Whatever you're doing 80% of the time is probably a waste of time. If you make most of your money from a small part of your activity, you should turn your business upside down and concentrate your efforts on multiplying that small part.
  • If an activity succeeds beyond expectations, it's likely a 20% activity.
  • The vital few give success to you. A few things are always much more important than most things.
  • The biggest wins all start small. Something big always comes from something that was small to start with. Look for the "invisible" 20% of small, key causes. They are there -- find them. Unexpected successes are one clue.
  • Exploit 80/20 arbitrage. Ruthlessly prune 80% activities, such as checking email, to free up time and money for 20% activities. The profit is enormous because it is highly leveraged arbitrage.
(For more ideas like these, download Guaranteed Marketing for Service Business Owners.)

No comments:

Post a Comment