Remember the Pareto Principle (80/20 Principle) from your high school math class years ago? Well, turns out it can be just as applicable to farming as it is to the business world.
Using the 80/20 Principle, Christmas Tree growers can increase profitability and efficiency at their Christmas tree farms.
By applying the 80/20 Principle, Christmas tree growers can:
- Increase profits while working less
- Decrease advertising spending while attracting more paying customers
- Spend more time on more enjoyable tasks…or simply relaxing
In short, the 80/20 Principle guides a grower to achieve more while doing less by focusing on activities that generate the most value and ignoring ineffective activities.
Before we apply the 80/20 Principle, let’s review where it came from for context.
Background on the 80/20 Principle
In the late 1800s, Vilfredo Pareto, an Italian economist, discovered that Italian wealth was distributed extremely unevenly. Approximately 80% of the wealth in Italy was controlled by 20% of the population, hence the name “80/20 Principle.”
This extreme wealth imbalance also existed in many other countries; however, the most intriguing aspect of the 80/20 Principle is it applies broadly in many aspects of life.
For example, 80% of stock market gains often come from 20% of an individual’s portfolio and 80% of results in any endeavor come from 20% of the effort and time spent.
The ratio of inputs to outputs does not always follow 80/20 exactly, but the ratio is always extremely unbalanced, such as 95/5 or 75/25.
As Richard Koch describes in his book The 80/20 Principle, the main takeaway is that “a minority of causes, inputs, or effort usually lead to a majority of the results, outputs, or rewards.”
How Can the 80/20 Principle Help Christmas Tree Growers?
The 80/20 Principle applies to almost everything in life, including Christmas tree growing.
The principle works because complexity often leads to hidden costs and lower profitability.
Applying the 80/20 Principle requires a grower to focus on his most important activities and quit ineffective activities. And, it is key to prioritize simple solutions versus complex solutions (Occam’s Razor – another fan favorite guiding rule).
When I had my Christmas Tree farm, I felt there was never enough time in the day to complete the many farm tasks. However, I often had to remind myself that busyness can be an indicator that I was not focused on the right things.
As Tim Ferriss discusses in his book The 4-Hour Workweek, “being busy is a form of laziness—lazy thinking and indiscriminate action” and that “lack of time is actually lack of priorities.”
A Christmas tree grower can use the 80/20 Principle to prioritize activities that generate the most profits.
Increase Profitability
A grower likely earns at least 80% of profits from 20% of activities and from 20% of revenues.
The key is to uncover what activities and products generate the 80% of profits and focus on those activities because they deliver outsized results.
A grower should analyze profits in three different ways to uncover the most profitable activities:
1) By product or product type
2) By customer or customer type
3) By geographic area
(1) Product or Product Type
A Christmas tree grower should analyze profits by product or product type.
The main products a Christmas tree grower has are his different tree species. A majority of a grower’s profits likely come from one or two tree species.
Once a grower determines which species generate the majority of his profits, a grower could:
- Raise prices on the most profitable species
- Stop planting unpopular or less profitable species
- Plant more of the most profitable species
- Or other strategies to focus on the most profitable species
80/20 Analysis Example
For example, a hypothetical sales breakdown by species is shown below:
After performing an 80/20 analysis, the hypothetical Christmas tree grower realized that two species, Concolor Fir and Noble Fir, comprised 90% of his profits. This means that 29% of his species accounted for 90% of his profits (29/90).
To increase total profitability, the grower decided to stop growing the four lowest-profitability species (Korean Fir, Blue Spruce, White Pine, and Turkish Fir). He planted more Concolor Fir and Noble Fir, and increased sales for those highly-profitable species. The grower continued to sell Canaan Fir because it comprised a large portion of his sales and customers liked them, but started planting less Canaan Fir and focused on transitioning customer to the two most profitable species.
By applying the 80/20 principle, the hypothetical grower more than doubled his total profit while selling the same amount of Christmas trees!
A grower could perform a similar analysis by product type, such as choose-and-cut trees, wholesale trees, B&B trees, wreaths, and merchandise. Extra effort should be spent selling the most profitable product types because they will result in the most profit with the least amount of time worked.
After running an 80/20 analysis, a Christmas tree grower might decide to totally eliminate some product types. For example, balled and burlapped trees might deliver minimal profits but require significant time to dig, wrap, move, and sell. A Christmas tree grower might decide that B&B profits are not worth the time investment and decide to use his valuable time elsewhere on more profitable activities.
(2) Customer or Customer Type
A Christmas tree grower should also analyze profits by customer or customer type.
A wholesale grower likely has a few large customers that create the majority of his profits. A wholesale grower might decide to focus his efforts on providing exceptional service to these few, best clients and possibly stop doing business with lower ROI clients. These lower ROI clients could be highly labor or time intensive for little return. Selling more trees to profitable customers is a much better strategy than expanding the client list to include less-profitable customers.
A grower should always ask “How do I give exceptional service to my best clients?”
Also, the grower could try to attract other clients similar to the most profitable clients he already has. This strategy could also include attracting a grower’s ideal customer.
For example, a grower might decide that his target customer is young moms with children. In addition to targeting advertisements to where young moms might see them, such as Facebook or mom blogs, this grower might also offer additional services busy moms with children would appreciate. Rather than simply selling a tree, a grower could offer Christmas tree delivery, complete with set-up and take-down after the Christmas season. Many busy moms would likely jump at the additional offerings and pay a premium for them.
A grower should always ask “What else would my best or ideal customers want?”
(3) Geographic Area
A Christmas tree grower should also analyze profits by customer geographic area.
A choose-and-cut grower’s market is necessarily geographic because most people are willing to drive a limited distance to buy a Christmas tree. A majority of a grower’s customers likely come from a few areas of town or zip codes. Once a grower knows where the majority of his customers live, he can target other residents in those areas.
For example, one way to do this is to utilize the United States Postal Service’s unique service called “Every Door Direct Mail.” A grower can mail a post card to every resident in a zip code or even specific mail routes, all for just the cost of the individual post cards plus postage (i.e. mail 5,000 postcards @ $0.219 each = $1,095 direct marketing campaign).
More 80/20 Tips Next Week
Now that we’ve reviewed how to maximize profitability, next week’s article will focus on how to use the 80/20 Principle to decrease wasteful spending and how develop a recordkeeping system that can be used for 80/20 analysis. Stay tuned for more tips and don’t hesitate to reach out with any questions or comments!
