Updated: Mar 17, 2021
The world is not in perfect balance. 80% of the world’s wealth belongs to 20% of the world’s population. 80% of revenue in any industry is generated by 20% of businesses. 80% of your happiness comes from 20% of your activity. Discovered in 1906 by the Italian economist, Vilfredo Pareto, the 80/20 Principle (also known as the Pareto Principle) is inescapable. Once you hear about it, it’s impossible to ignore.
But what does it mean?
In his landmark book on the principle, Richard Koch provides the following definition:
The 80/20 Principle tells us that in any population, some things are likely to be much more important than others. A good benchmark or hypothesis is that 80% of results or outputs flow from 20% of causes, and sometimes from a much smaller proportion of powerful forces.
The 80/20 principle is not a magic formula. Sometimes the relationship between results and causes is much closer to 70/30 than to 80/20 or 80/1. But it is very rarely true that 50% of causes lead to 50% of results. The universe is predictably unbalanced. Few things really matter.
This isn’t a passive concept that you should stand and watch happen to you. It’s something that you can use to your advantage to improve your life or, in this case, your glamping business. In this blog post, we’ll be setting out four ways you can use the 80/20 Principle to transform any glamping business.
Resolving Customer Complaints
The vast majority of your problems in regard to product defects or customer complaints can be fixed by focusing on the small minority of causes that have a disproportionate effect.
For example, if you’re frequently told that your glamping pods aren’t accessible enough for the disabled, installing wet rooms and adjustable sinks will help a little, but 80% of those complaints will probably be resolved by just using ramps instead of steps, or by widening your doorways slightly. The bells and whistles shouldn’t necessarily be ignored, but you should start by focusing on the small issues that cause most of the problems, as this will save you the most time, money and hassle.
Focusing on the Most Profitable Aspects of Your Business
20% of your revenue streams will account for 80% of your profit. Business owners often try and squeeze in as many revenue streams as possible, without realising how little it will do to improve their bottom line. Doing this takes their attention away from the one or two revenue streams that are generating the majority of their business’ profit, meaning they don’t maximise these areas as much as they should do.
If you’re a manufacturer of luxury glamping pods, your most profitable source of income is going to be the production and supply of luxury pods to site owners. You might think that offering advice on setting up a glamping site, or selling hot tubs on the side, is a good idea because it brings in additional revenue, but you’ll be spreading yourself too thin. Instead, focus on how you can maximise the profits from your speciality, e.g. by improving your pod designs.
You can take this principle to a product level, too. If you sell ten different glamping pod styles, but two of them account for 80% of your sales, consider dropping the other eight pods. Focus your money and attention on marketing the two best-selling pods, and thinking about how you can generate even more profit from them. Don’t worry about losing ‘stature’ as a result of simplifying your product range. As Koch says:
Excuses like this rest on the strange view that shoppers like to see a lot of product that they have no intention of buying which distracts attention from the product they like to buy.
This is closely linked to the previous tip. Here’s what Koch says on applying the 80/20 Principle to outsourcing areas of your business:
Outsourcing is a terrific way to cut complexity and costs. The best approach is to decide which is the part of the value-adding chain where your company has the greatest comparative advantage - and then ruthlessly outsource everything else. This can take out most of the costs of complexity and enable dramatic reductions in headcounts, as well as speeding up the time it takes you to get a product to market. The results: much lower costs and often significantly higher prices too.
Let’s use the luxury glamping pod manufacturing business as an example again. Your speciality is designing and building unique-looking pods with luxury interiors. That’s the competitive advantage you should be focusing on. You shouldn’t be wasting your time on building the timber frames for your pods, as that’s not what you’re best at, and it’s not going to wow the customer (they can’t even see the frame!).
So, you should outsource boring stuff like that to a company like Made Of Bits, as we can supply your glamping pod frames, speeding up your pod-production process and allowing you to focus on your strengths.
Focus on the 20%. Outsource the 80%.
Keeping Your Best Customers
If you hadn’t already guessed by now, it’s time to tell you that 20% of your customers probably account for 80% of your profits. This is particularly true for glamping site owners, who will have some customers that return again and again for years. Instead of spending all your time chasing new customers, that might well be one-time visitors, focus your attention on surprising and delighting those who have the potential to becomes loyal fans of your glamping site.
Four steps to lock in your core customers, according to Koch:
Identify the most profitable customers.
Provide them with ‘outrageous service’. It will have a short-term cost but a huge-long term ROI.
Ground your innovation with your core customers in mind. Figure out what they like and would look for in new offerings, and base your new offerings around that. For example, if they like modern amenities like Netflix and voice-activated lighting, think about what other gadgets you could include in your glamping units.
Aim to keep them forever.
The key theme running through all of this is the importance of stepping back and finding the 20% that you should be focusing on. In any aspect of your glamping business, be it your customer complaint process, revenue streams, product range, production process or customer satisfaction assessments, it’s likely that 80% of your headaches or profits are arising from a minority of causes. If you can find and exploit these, you can transform your business and reach for the stars. Do you manufacture glamping pods, shepherd huts or any other form of glamping accommodation? Are you interested in speeding up your production process and lowering your costs with CNC-cut timber frames? Click here to find out how we can make your life easier.