The Paro Overlap: Optimizing Your Business for Success

Today, we’re going to talk about the Paro overlap. Now, I’m smiling a little bit here because this is a term I’ve made up. You’ve probably never heard of it before, but you’ve likely heard of the Pareto principle. It’s not the overlap, and what we’re going to address is a common challenge that business owners have. In fact, most business owners get stuck because we overestimate our capabilities. We think we can do anything and everything. I call this the “I can do everything” syndrome.

When you started your business, you probably did the accounting, delivered the product or service, and were the salesperson. A small business, particularly in the early stages, necessitates that the founder, the owners, or the initial core team do everything. Then there’s this diluted belief that we’re extraordinarily capable in everything. The reality is, we’re not. You are great in a few areas, just like every other human being on this planet. You have specialized talents, but the necessity of entrepreneurship has us doing everything, and we think that’s the standard.

The “I Can Do Everything” Syndrome

Because of this syndrome, many small businesses start diversifying. It seems easy to add on this additional product or service, and you do get it done, but usually at a very marginal level. The elite companies, the companies that are very successful, are the best in their category. Inevitably, this is the old analogy you’ve probably heard in sports or the Olympics: when someone wins the gold, they win it by 1/100th of a second or something. It’s very close, but everyone remembers the Gold Medal winner. No one remembers the silver or bronze, and forget anyone else, even though the whole contention is very close. The competition is all within split seconds of each other.

The difference between an extraordinary company and an ordinary company is usually a small difference, but that difference takes an extraordinary amount of effort to get you that 1/100th of a second faster, better, and therefore beating the competition. So that’s what we’re going to explore together today: how to really grow your business healthfully and organically.

The Captive Audience Belief

One of the points of resistance is this concept of “I can do everything.” The second thing is there’s a belief that perpetuates called the “captive audience.” Once you have a customer, you have a captive audience. Sell them more things because they’re already doing business with you. In my book, “The Pumpkin Plan,” I talked about this phenomenon. I shared a story about my own landscaper, Ernie, who is extraordinary at doing the work. He shows up, he’s a friendly guy, and he maintains the lawn. But he realized he had a captive audience in me.

One particular fall season, during the cleanup of the leaves, he noticed leaves on my roof. He said, “Hey, if you like, we can clean off your roof and clean out the gutters. I can go up there and do it.” I’m a captive audience, so I said, “Sure, go do it.” He left for a bit to get ladders or whatever and went up there with his colleagues to start cleaning off the roof. He came back down and said, “I noticed some shingles are loose, and there’s a crack in your chimney. We can fix that. Do you want me to do it?” I said, “Yeah, sure, do it.”

He was gone to get more equipment. I don’t know what you need to fix a chimney and replace shingles, but he had to get the supplies and equipment back. He worked so late that particular night that they had to go back out again to get lights to illuminate the roof to finish their work. By the time he was done, the lawn and leaves around the house were messy again, and he had to come back the next day to clean it up.

The Trap of Diversification

Now, the concept for the small business owner is, “My gosh, I have a captive audience. Look how much money I made from this because he billed me for each service.” But I think the other landscaper was laughing at Ernie because while Ernie did that one big project with me, the other landscaper maintained 10-15 properties. He was doing the same thing with the same equipment over and over again. Ernie had to buy additional equipment, run down to the store, and face all these distractions. He didn’t do a good job because he had never done this work before.

We lose these efficiencies as we cater to a captive audience and diversify our offering. It also puts more demand on our organization to have a greater breadth of skills, more equipment, and elements like that. Greater diversity places greater demand on the organization, making us less efficient. That’s another trap we run into.

Observing Competition

We also see the competition introducing products or services, and this can be a common illusion. We look at multiple competitors and say, “That competitor does X, another one does Y, and the last one does Z. Clearly, we need to do X, Y, and Z.” But they may be different competitors, or you have one competitor who’s doing multiple things, and so you think you have to do multiple things. But they may be struggling, and you don’t even know it.

The challenge is we have many demands on us psychologically based on confirmation bias, looking at the environment around us, and diversifying. But there’s one big factor: in the early stages, the easiest way to grow is simply to do more things. Acquiring that next customer is hard. You don’t have a market reputation; customers don’t know you exist. So you have that first customer or the first few customers; they’re captive. Offer more; it’s easier.

The McDonald’s Model

In the beginning, you can get by with a diverse offering, but as you get beyond that million-dollar point (and I’m not saying that’s a hard number, it’s just my observation), you need to start bringing on full-time help. As you do this, you start losing efficiencies because people have to relearn and retrain; they have to diversify themselves.

Think about the McDonald’s model. This is true with any fast food restaurant: have the fewest ingredients you can. Package them in different ways. You can make a hamburger with two patties instead of one and give it a new name, and it’s perceived differently, but it’s the same ingredients. Reduce your ingredients, a.k.a. variability. Follow as few processes as possible to get the end result, maybe package them differently to give the variability. That’s how you’re going to scale. It’s about reduction.

Introducing the Paro Overlap

That’s why we’re going to dig into the Paro overlap because this isn’t considered by most businesses. So this is how the Paro overlap works. I want you to consider two columns, deploying the 80/20 principle. Column one represents our existing clients; column two represents our products or services, which I’ll call our offer. I’m going to break this into 20%. Here’s 20%, and here’s 80%. I’m going to do the same for our offer, and just to show an interesting dynamic, I’m also going to identify the lowest 20%. Above it represents the 80%, and in the middle, it’s 60%. So now you see how the 80/20 works.

Understanding Pareto’s Principle

A little history lesson: Pareto’s principle. Vilfredo Pareto was an Italian economist. He was directed by the king of the time to study the economy and found something fascinating: the minority of the Italian economy was maintained by the majority of the people. 80% of the population had 20% of the wealth, and interestingly, 20% of the people maintained the majority of the economy, holding 80% of the wealth. This became the 80/20 rule: 80% had 20%, and 20% had 80%.

This phenomenon wasn’t just with finances in Italy; it plays out in many aspects. Pareto observed in his garden that 20% of the plants gave 80% of the fruit, and 80% of the plants gave 20% of the fruit. The 80/20 principle is evident in various areas: your clothing, the roads you travel, and so on. This phenomenon plays out in your business, and once you understand this, you can apply it to grow a healthy business and break out of entrepreneurial entropy.

Analyzing Clients and Offerings

Let’s look at the clients. Analyze your clients and sort them out from most revenue to least revenue over the last year or a 24-month period for a better perspective. Take your clients, sort them from most revenue to least revenue, and look at your cumulative revenue. For example, if you generated $1 million in revenue, multiply that by 80%, which is $800,000. Identify where the $800,000 cumulative stops. Usually, it’s the minority of your clients yielding the majority of revenue.

Once you’ve done this, you’ve identified your top clients, the ones who spend the most with you up to 80% of the revenue. You can also do this in reverse, identifying from the bottom up how many it takes to get to the remaining $200,000. You’ll often see there are a lot more below than there are above. The clients that demand the most from you, meaning they spend the most money with you, enjoy working with you, and give positive reviews, are the best clients. The clients at the bottom are generally unfit clients; they’re bad for business.

Profit Analysis of Offerings

Now do the same analysis for your offering, but this time it’s a profit analysis. List out all your products and their profitability. Sort them from most profitable to least profitable. If the Pareto principle holds true, a small percentage of your offerings yield the majority of your profitability. Identify your best stuff, your best clients, and the unfit clients.

Here’s how the analysis works: there are four core principles. The first one is your best clients buying your best stuff. These clients pay a premium, do a lot of business with you, and like you. They are the heart of your organization. The second scenario is unfit clients buying items that aren’t profitable. These clients are bad for business; they don’t pay well, are demanding, and can be a significant drain on your resources.

Conclusion

In conclusion, the Paro overlap is a powerful tool for optimizing your business. By analyzing your clients and offerings using the 80/20 principle, you can identify your best clients and most profitable products, and focus on them. This will help you grow your business healthfully and organically, while avoiding the traps of diversification and the “I can do everything” syndrome. Remember, it’s about doing less but doing it better. Focus on what works and eliminate what doesn’t to achieve long-term success.

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