The 80/20 Principle — Summary
Explore this principle of nature to improve your life
You have probably observed that often the majority of output stem from the minority of input. It could happen in your business when the majority of sales come from a little subset of your products. Often this ratio is around, but not limited to 20% and 80%.
That’s why it’s called the 80/20 rule or principle. Aka the Pareto principle, the law of the vital few, or the principle of factor sparsity.
The ratio could be more dramatically like 99.9/0.01 or less drastic 60/40, but the point is that, in most cases, there is a non-linear relationship between input and output, effort, and results.
Feedback loops produce imbalance
Sir Isaac Pitman discovered that about less than 1% of the words in the English language make up over 80% of what we say.
But why does this non-balanced relationship happen? It turns out that feedback loops generate those types of disproportion.
Multiple goldfish for instance, despite living in the same pond, still grow into very different sized fish. Why is that? Some of the fish started out slightly larger than others which gave them a small advantage, which in turn, allowed them to catch more food and so they grew faster than the smaller fish.
The cycle amplifies with each loop. With each loop, the difference in size and the speed of growth gets bigger, ending in a substantial difference in size between the fish.
Many people consider such imbalances unfair. A famous example is the wealth distribution. When 1% of the world’s population own more than the 99% combined, we call it unfair.
People assume that work and reward should have a fair 1:1 ratio. But the laws of nature seem not to work like that.
How to apply the 80/20 rule to get better results
Think about it, if 20% of your work accounts for 80% of your results, that means that the 80% of your work is egregiously inefficient. You should analyze what you do differently during that efficient 20% of your time and apply it regularly. Your results would be multiplied.
If 20% results in 80%, that’s a ratio of 4, which means extending that 20% to 100% would give you 400% of your current results or potentially much more since there could be other external feedback loops.
A typical example where the rule could be applied is in the productivity spike which tends to occur once people approach the deadline for a project. You could identify what makes the first phases of your project less productive, for example, over-thinking and procrastination. Making sure to rearrange your process to avoid those mistakes will considerably increase your productivity.
80/20 in business
If you want to optimize your business with the Pareto principle, the first thing to do is identifying the products which bring you the biggest reward (the 20%).
The second step is to focus on those products and exhaust their potential. That could mean doubling the production until the profit ratio drops to normal.
The author told the management of an electronics company that their only goal should be to double the sales of their best three products, ignoring everything else.
Reduce complexity by focusing on the essential and economics of scale
A study of 39 medium-sized companies found that the least complex ones were the most successful. By selling a narrower range of products and having fewer suppliers, they could focus more efficiently and make higher profits.
Most people think that more always generates more. Thus a bigger company and a broader range of products should result in more profits. But as it turns out there are many hidden costs in complexity.
A broader range of products requires more complicated logistics, more training for salespeople and a lot more administrative work. If these expenses equal or even exceed the money those additional products bring in, there would be no point of those additional products.
Often a company can do better by devoting their attention to a few important products and gain an in-depth understanding of them. Doing so simplifies administrative work and can also bring economies of scale, that is, reducing the cost of production and thus, increasing profitability.
80/20 for everything, from negotiations to marketing
The 80/20 is incredibly versatile. You can apply it for nearly anything, for example in negotiations. When negotiating something, instead of trying to defend all points, you should identify the ones who matter the most to the company and then focus on winning them rather than trying to argue for all points. For more on negotiation check out the book “you can negotiate anything.”
Marketing is another good target for the Pareto principle. Focusing on the 20% of customers who generate 80% of your revenue, could significantly increase your income. Their loyalty of those profitable customers would be improved by providing them with a more focused customer service.
For Nicholas Barsan, one of the top real estate brokers in the US, a group of customers who resell their houses, bring over a third of the $1 million he makes in personal commissions each year. Clearly, his focus on those clients is a profitable strategy.
Learn to think non-linearly
To benefit from the 80/20 principle, you have to change your way of thinking. We tend to think linearly, assuming that causes and inputs are equally important. That is the conventional way of thinking, for example, children are taught that all of their friends are equally important.
In this scenario, we should, without diminishing the inherent value of anyone, that not all relationships are equally valuable.
A subset of your friends are the ones who produce the biggest “value” for you, for example, feelings of joy and inspiration/motivation to accomplish your goals.
This type of 80/20 thinking can help you succeed in many areas of life.
Focus on the essential tasks
Instead of traditional time management techniques, which often just try to fit into an already busy schedule, focus on the important stuff.
When you first get the 20% done which produces the most results, you have already accomplished 80%. Reorder your priorities so that you always do the important things first, and then if there is still time, the remaining tasks.
Originally published at Karlbooklover.
