Growth is often an excuse to forgive profits. In a period of significant change, you want to focus on the most important sales, customers and products. You need to apply the 80/20 Principle or the Pareto Principle. This common principle teaches us that 80% of our results come from 20% of our efforts. The flip side is also true. This means we need to stop doing the things that are often losing money.
How to Increase Your Profits in a Down Economy
Applying the 80 / 20 Principle to your Sales
Less Sales = More Profits?
“The way to create something great is to create something simple” – Richard Koch, The 80/20 Principle: The Secret to Achieving More with Less
I have a growth mindset. Most of my career has been supporting amazing companies increasing 2X to 10x. There is nothing more exciting than to provide more value to the world by providing your products and services to those who need it. It is a joy to hire great people to accelerate that growth and continue the efforts to build a dynamic organization.
BUT…something funny happens when you grow. We have this tendency to pursue growth over profits. In our drive to capture market share, provide more products and services, we forget about that number on the bottom line. The excuse is consistent and often convincing – WE ARE INVESTING in growth so our short-term profits may decline because it will work out in the long run.
Why put savings in the bank with a .0000001% interest rate when we can make a 5% return in five years on every dollar invested in this new unproven market?
Then something like COVID happens…
Sales decline and/or our cost to deliver services to the same customers increase due to PPE, medical costs, government closures, higher security, taxes, price competition, etc.
And we have no cash because we invested that in the FUTURE…but the FUTURE is NOW.
Applying the 80 / 20 Principle
Introducing the 80 / 20 Principle or commonly called the Pareto Principle from the Italian Economist Vilfredo Pareto.
The Pareto Principle is simple. 80% of our outcomes come from 20% of our activities.
20% Efforts = 80% of Outcomes.
Which also means, the other 80% of Efforts = the other 20% of Outcomes.
Keep in mind this is a principle not gravity theory. Sometimes, 20% = 75%, or 20% = 90%. The principle stands true often enough to analyzie for your organization.
Let’s use some common examples in the real world.
- In 2017, the top 20% of earners paid about 87% of income taxes
- 20% of the World’s Population controls 82.7% of the world’s income
- 80% of the errors in Windows and Office are caused by 20% of the bugs detected
Increase Profits in a Down Economy
Back to the original question, how do we increase our profits in a down economy?
We STOP selling the 80% of our products and services that are only contributing to the 20%. We STOP selling to the 80% non-profitable customers. We STOP selling 80% of products in our store that hardly ever sells.
We FOCUS our time, energy and remaining cash on that Top 20%. This may also mean you may have to eliminate part of the support and services that service the 80%. This is WHY most people don’t make that change.
However, today, your hand has been forced. Focus on the profitable. Reduce or eliminate the unprofitable. Move part or all of those 80% profitless energies into serving the top 20%.
As your profits turn to cash, consider putting 6 months to 12 months of operating cash into your bank account. The next time a recession hits, you will be able to boom in the next down economy with a clear focus. Start now!
If you have any additional suggestions, questions, recommendations and/or best practices, please send me an email to consider them on a future blog.
Here is my Calendar Link for a 20 Minute Strategy Chat.
Links to Top Articles / Ideas / Websites
State by State Analysis to Reopen
100 Examples of the Pareto Principle
The Risks If Employees Refuse to Go Back To Work
Professional Referral
Adam Franklin for Bluewire Media from Australia. If you are looking to understand LinkedIn, how to increase your online presence or learn how to market online, I am a raving fan for Adam and his book Web Marketing That Works. Let me know if you would like his direct email.
Current Book Recommendation
There are several books on the Pareto Principle but this is one of my favorites. Richard Koch, The 80/20 Principle: The Secret to Achieving More with Less
Past Book Recommendations
The Hard Thing About Hard Things, Ben Horowitz
What Your Do Is Who You Are, Ben Horowitz
Born to Win, Find Your Success, Zig Ziglar and Tom Ziglar
See You at the Top, 25th Anniversary, Zig Ziglar
Extreme Ownership, Jocko Willink and Leif Babin
Predictably Irrational, Dan Ariely
Across the Board, Mark A. Pfister
Factfulness by Hans Rosling, with Ola Rosling and Anna Rosling
Upcoming Webinars & Workshops
Here is today’s Zoom recording on How to Develop a 10 Week Plan to Return Your Team back to your Work Site. Email me for the password to catch@40strategy.com.
Pivoting Your Organization’s Strategy During COVID-19, Thursday, May 21st, 9AM PT, with the American Osteopathic Foundation.
Free 40 Point Checklist to Conduct Your Zoom Webinar, email me for a copy.
Past Webinar Links
On April 22nd, 2020, we co-host Crisis Strategy: Successfully Pivoting Your Personal Strategy in Times of Change, with Mark A Pfister, Author of Across the Board. Here is the recording.
On April 23, 2020, Vacilitation: Managing Your Team Strategically in a Virtual World, with Technology Association of Oregon
Give this a few weeks to blend into your weekly routine. If you like it, copy the article link and share it on your social sites. Send me your comments, thoughts and suggestions to improve this to catch@40strategy.com. Sign-up here!
PS – If you did not get the pre-blog email, here is the Saddle Up beginning.
Volume 2020:7
