Pareto principle and the 3% differential

The Pareto Principle, named after economist Vilfredo Pareto, specifies that 80% of consequences come from 20% of the causes. This principle serves as a reminder that the relationship between inputs and outputs is not always balanced. The Pareto Principle is also known as the Pareto Rule or the 80/20 Rule. Business management thinker Joseph M. Juran suggested the principle and named it after Italian  economist Vilfredo Pareto, who observed that 80% of income in Italy went to 20% of the population. It is a common rule of thumb in business; e.g., "80% of your sales comes from 20% of your clients."

Financial advisory businesses commonly use the Pareto Principle to help manage their clients. The business is dependent on the adviser’s ability to provide excellent client service, as its fees rely on its client’s satisfaction. However, not every client provides the same amount of income to the adviser. If an advisory practice has 100 clients, according to the Pareto Principle, 80 percent of the financial advisor’s revenue should come from the top 20 clients.

However, this appears difficult for financial advisers to implement. Suggesting that 20 clients are paying 80% of the advisory business fees, these clients should then receive 80% of the client service. Advisers should therefore spend the bulk of their time maintaining relationships with their top 20 clients. Invariably this does not happen.

Read more: http://en.wikipedia.org/wiki/Pareto_principle 

The 3%differential

The 3% differential is simply identifying areas in your business that you believe you can make small improvements on, so that together, they give your business the lift that it needs to ensure the step change you are looking for.  Consider the following:

  In 2003 Davis Love won $6,081,896 on the golf circuit. His per round stroke average was 69.41

  In that same year Mike Sosa, an unknown pro, won $276,447 with a per round stroke average of 71.35.

  We can see that Davis Love shot just over 2 strokes per round better that De Sousa but won 22 times more money

  This difference between the two pro-golfers was called the 3% differential.

Many golfers apply this differential by making small changes to their stance, their grip, their swing and even their earnings! The lesson: incremental improvements can make a big change in the way your business performs!

You too can use this 3% differential to your advantage.  See how the Pareto principle and the 3% differential can help you focus on the small things that matter.