A rule of thumb is a practical guideline based on experience, used for simplifying decisions and actions, and deviations from it can highlight potential problems.

Primary Implication

One of the quickest ways to develop expertise in your industry and market is to learn what is generally accepted as correct.  For example, learning that you should expect to get two times your labor cost or markup materials 50% helps you gauge if you are undercharging for your products and services.

Nothing worse than leaving money on the table because you fail to mark up your costs within industry norms.

Overview

A rule of thumb is a broadly accepted decision and action guide based on experience or practice rather than theory.  They never describe an exact method.  What they do is give you a general approach to getting things done.  Its origin isn’t what’s important.  What is essential is how any rule of thumb you have come to accept helps you shortcut your considerations.  Help you simplify what is inherently complex.

A violation of a rule of thumb is how you recognize where things aren’t going as they should.  It gives you a starting point for assessing what went wrong and how things should be adjusted going forward.  They are not intended to apply to every unique situation, so they should be set aside when making big business decisions that could change the risk profile for your business.

One of the best rules of thumb involves the 80/20 rule, also known as the Pareto Principle.  This rule assumes that 80% of results come from 20% of any event’s inputs or activities. For example, many businesses will find that close to 20% of their customers account for 80% of their profits.  Using this rule of thumb helps you isolate what areas of the business produce the most profits or consume the most resources.