Management strategies follow trends, just like fashion. Some are fads – fun, but fleeting. Others are genuinely cringe-worthy; we look back later and wonder, How did we ever think THAT was a good idea? Then there are the ideas whose simplicity and proven results mean they never go out of style; or at least, they re-emerge for every new generation of business leaders under a new name. The Pareto Principle is one of these classic ideas. (You may also know it as the 80/20 Rule.)
While the Pareto Principle is simple and straightforward in, well, principle, putting it to work in your insurance business can be tricky. If you apply the concept too enthusiastically, you can cause real damage. To help you avoid this pitfall, here are some DOs and DON’Ts for putting the 80/20 Rule into practice.
What Is the Pareto Principle?
We sometimes refer to accountants as “bean counters,” but it was counting peas that produced the Pareto Principle. According to legend. 19th-century Italian economist Vilfredo Pareto noticed that 20% of the pea plants in his garden produced 80% of the peas harvested. Further research showed that this uneven distribution governed other economic sectors as well. Pareto found that across industries, 20% of companies accounted for 80% of production. He also discovered that 20% of the population owned 80% of the country’s wealth.
Later business theorists applied the Pareto distribution more broadly to state that 80% of results come from just 20% of actions. This generalization became known as the Pareto Principle.
Applying the Pareto Principle to Marketing and the Customer Experience
Acquiring new clients and retaining existing ones is essential for any business. There are many ways to apply the 80/20 Rule to this goal; here are a few ideas.
DO have a way to easily identify your elite clients, the 20% that generate most of your revenue. If you offer multiple products or service solutions, it’s a good idea to run lists for each area. Once you have the list(s), analyze each customer carefully; then tweak your marketing efforts to target prospects with a similar profile. Of course, you’ll also want a client retention program to keep your existing elites happy and upsell other solutions to them. Don’t forget to ask them for referrals, too.
DON’T make the mistake of neglecting the other 80% of your customer base. A low-and-slow nurturing campaign can help build them into more productive accounts without blowing your budget. If you do decide to cut loose a low-performing account, make sure to show your appreciation for their past business and help them transition to a different solution that more closely aligns with their needs. You don’t want to burn any bridges!
If 20% of your revenue comes from one or two clients, you may need to diversify your client base. While focusing on a handful of “whales” can be simpler and most cost-effective than managing a larger client list, if one of them goes out of business — or worse, jumps to a competitor — it can seriously impact your bottom line.
The 80/20 Approach to Performance Improvement and Quality Assurance
Often we get so busy handling the day-to-day tasks of our businesses that we don’t find time to step back to see how well processes actually work and how they can be improved. Applying the Pareto Principle can help focus limited resources to achieve maximum impact.
DO identify your top 20% problems. Don’t focus on only the crises that have a huge, one-time impact. Those are important, of course; but small problems that keep recurring may actually be doing more damage to your profitability and customer satisfaction. Once you know what the problems are, analyze them to determine the root cause(s) triggering them. Don’t be surprised if you find some overlap. Create action plans to address the underlying issues and quantifiable KPIs to measure performance improvement.
DON’T get bogged down trying to stamp out every little problem in your 80% category. It is important to track and trend those incidents, however. If the frequency or severity starts to increase, then it’s time to take action.
Be careful to distinguish between problems that can be solved and situations that need to be managed over the long term. The latter category often involves factors genuinely outside your control. The trick here is to have a plan in place to rapidly detect and respond to a situation before serious harm is done.
The Pareto Principle and Staffing
This is the area where the overly-aggressive application of the 80/20 Rule can cause real damage. Labeling employees as “less than” — especially if there isn’t a clear pathway for improving their status — will likely result in interpersonal conflict and plummeting morale.
DO identify your top 20% producers. That doesn’t mean just the top salespeople, though. If a process or function is essential for keeping your business running, the people involved in it need to be considered for elite employee status. Recognize their contributions in ways that are meaningful for each individual for maximum employee retention.
DON’T make the mistake of thinking, If 20% of my team is producing 80% of the results, why am I paying the other 80%? Get rid of the dead weight! Apart from the massive paranoia such a tactic creates in the survivors, the fact is that even your best performers aren’t great at everything. Who’s in the top 20% will likely vary based on the skill being assessed. And even if you do happen to have a herd of unicorns in your employ, you’ll likely burn them out if you suddenly dump a ton of extra work on them.
When assessing employees’ contributions, look beyond dollars generated. Top performers may have roles where attributing revenue is more complex. Consider the institutional knowledge each employee embodies, especially when it comes to those with infrequently-used skills that would be difficult or costly to outsource or replace.
Keep Things in Perspective
You may have noted a common theme in these DOs and DON’Ts. The Pareto Principle, although easy to express, is a precision tool, not a sledgehammer. Applying it too broadly or without due consideration is a recipe for disaster. Additionally, it shouldn’t be only one tool in your managerial toolbox. There’s no single, simple solution for the complex problems that today’s insurance business owners face. That’s why it’s so important to keep lines of communication with your team open and embrace lifelong learning.