Pareto (80/20 Rule) Principle: How To Use It To Grow Your Businesses?

                The Pareto principle (also known as the 80/20 rule, the law of the vital few, or the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes. Put another way, 80% of business outcomes can be contributed to 20% of all the causes for a given event. This principle is named after Italian economist Vilfredo Pareto, who found that 80% of the land in Italy was owned by 20% of the population in 1906. The most important thing about this principle is that it can apply in any field whether in your life or businesses. However, I will discuss about its importance in the business field only in this blog.

                It does not matter which businesses are you in, this 80/20 rule can be profoundly found. For instance,

·         What? - 80% of your sales can be generated through 20% of your products.

·         Where? - 80% of your profit can be generated through 20% of your market segments.

·         When? - 80% of your results can be achieved by using 20% of your time.

·         Why? - 80% of your business objectives can be accomplished by focusing on 20% of your business activities.

·         How? - 80% of your profit can be obtained by focusing on just 20% of your customers.

                It can be said that this 80/20 rule has been used as a tool to grow your businesses successfully and as profitable as possible. This rule will be helpful for identifying your most important business priorities which can have a potentiality to instill 80% of your business results. Now while this rule has been used by many savvy business owners and executives for many years, a recent and unique description of this rule has taken its importance and power to a totally new level. According to Perry Marshall’s book-“80/20 Sales and Marketing”- Pareto principle is even more exponential if within that 20%, the 80/20 rule exists. Putting it another, top 20% of the top 20% of your customers or businesses (or top 4% of the overall) represent 64% of your business success. Now it has become clear that top 4% of your businesses or customers may account for 64% business success.

                 In short, this 80/20 principles states that 20% of your business efforts is responsible for 80% of the results obtained. Understanding this will help the businesses to identify the most profitable customer or market segments, and launch targeted marketing campaigns with the most impactful consumers. This can be applied to many businesses, especially those that are customers-based. However, it can be applied to other fields such as time management, productivity and customer satisfactions and so on.

References:

https://en.wikipedia.org/wiki/Pareto_principle

http://www.investopedia.com/terms/p/paretoprinciple.asp

https://www.forbes.com/sites/davelavinsky/2014/01/20/pareto-principle-how-to-use-it-to-dramatically-grow-your-business/#222702fc3901

VALUE MIGRATION - How to Think Several Moves Ahead of the Competition

"Value Migration"

Have you heard the term "Value Migration" before? If not, then think about it as it is mainly concerned with business and marketing field. The concept of Value migration was first given by Adrian Slywotzky in 1996 in the book," Value Migration - How to Think Several Moves Ahead of the Competition." He is considered as one of pioneering consultant and author of several books on economic theory and management. His other books are: The profit Zone: How Strategic Business Design will Lead You to Tomorrow's profits (with David Morrison and Bop Andelman, 1998); The Art of Profitability (2004); The Upside (With Karl Weber, 2007), and Demand:Creating What People Love Before They Know They Want It (2011). He defines Value migration in terms of marketing and marketing strategy in his first book. In marketing term, According to him, value migration is the process of shifting value creating forces from outmoded business models to new demanding business models. Here new demanding business models refer to such models that are better able to fulfill and satisfy the customer demands or priorities. 
                  Slywotzky defines it in terms of marketing strategy as the art of creating value for the customers. In other words, he says that creating value for the customer mainly depends on offered products or services in the markets as per the corresponding needs of their customers. He also believes that factors determining value are also changing in a fast changing business environment. In the Slywotzky model, there are three types and three stages of Value which are shown below:

Three Types of Value
1. Between Industries: The value which flows between industries is generally known as value between industries. In this, value often migrates from one type of industry to another different type of industry.For instance, value of airline industry now has migrated to the entertainment industry.  
2. Between Companies: Sometimes value flows from one company to another but within same industry is called value between companies. For example, the value of Corel WordPerfect now has migrated to Microsoft Inc. 
3. Between business designs within a company: When value flows between the same business designs within a company then it is considered as value between business designs within a company. In this type, value migrates from one business design to another but within the same company. For instance, value of IBM mainframe computers has now migrated to IBM PC's with system integration. 

Three Stages of Value 

1. Value inflow stage: 
Value is absorbed from other companies or industries so that there will be no or limited competition, high growth rate, and high profitability.
2. Value stability stage: 
Value in this stage keeps remain the same so that there will be competitive equilibrium with stable market shares and stable profit margins.
3. Value outflow stage:
Companies lose value to other parts of the industry. As a result, there will be reduced profit margins, loss of market share, outflow of talent and other resources.
                    After understanding the types and stages of value migration, we have become familiar with how value migrates from old businesses and models to new or innovative ones that better satisfy the customer needs and desires. It also tells us that how the marketplace is constantly changing and how demand for a product is evolving. In all three types of value migration, marketplace seems to change both as a result of marketing and as a result of underlying changes in demand. Value is nothing more than the result of customer perception as determined by marketing and their own desires. Value migration occurs because the perceived value of one good drops as a new one becomes available and customers become aware of it. So it shows that how consumers' taste and preferences change over time, and which must be taken into account by respective companies or managers to understand the threat of new products hitting the markets that can potentially displace their own offerings. 
                    It is known that value can migrate within industries or companies or within a company's system. No matter where it is, value always will be attached with better products or services that best fit the customers' needs and desires. however, there comes a point where a company simply has to add a new product or features to an existing one to retain customers' interests. It's not only that customers are fickle, but they always do place value on having new or updated products as per their needs. Value migration, thus, can serve as a warning sign that customers' opinion can and do shift away from products or services that become outdated.  
                    Hence, having discussed all the above, an understanding the picture of value migration will help you to know where you and your competition fits within the marketplaces, and importantly see the dynamic potential shifts and movements within it. By mapping out the potential shifts, thus, will assist you to develop several business strategies and tactics that will both counter competitors and compliment your own advancements. 

References:
http://www.coatingsworld.com/issues/2012-07/view_business-corner/time-to-revisit-value-migration/ 
https://en.wikipedia.org/wiki/Value_migration