I was re-reading the 4-Hour Workweek by Tim Ferriss the other day, and he mentioned how he stumbled on the Pareto Principal and how it changed his life. Vilfredo Pareto (1848-1923), an Italian economist-sociologist, concluded that there are unequal relations between inputs and outputs and 20% of invested inputs is responsible for 80% of the results obtained. In other words, 80% of the results come from 20% of the causes. The main takeaway? A few things are important; most are not.
The reasonable man adapts himself to the world. The unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man. ~ George Bernard Shaw
The 80/20 Rule has been teased out over the years and significant research has shown that it applies to all sorts of situations:
- 80 percent of results come from 20 percent of efforts
- 80 percent of activity will require 20 percent of resources
- 80 percent of usage is by 20 percent of users
- 80 percent of the difficulty in achieving something lies in 20 percent of the challenge
- 80 percent of revenue comes from 20 percent of customers
- 80 percent of problems come from 20 percent of causes
- 80 percent of profit comes from 20 percent of the product range
- 80 percent of complaints come from 20 percent of customers
- 80 percent of sales will come from 20 percent of sales people
- 80 percent of corporate pollution comes from 20 percent of corporations
- 80 percent of work absence is due to 20 percent of staff
- 80 percent of road traffic accidents are cause by 20 percent of drivers
- 80 percent of a restaurant’s turnover comes from 20 percent of its menu
- 80 percent of your time spent on this website will be spent on 20 percent of this website
- and so on..
Think about it–the implication of the 80/20 Rule is that output cannot be just increased, but multiplied if we could make the low productivity input nearly as productive as the highly productive inputs. This way of thinking is not always easy or intuitive, but consider the implications in your business, your free time, and your relationships.
The 80/20 theory is useful for any company, but it must not be interpreted too rigidly or deterministically. The principles work because they are reflection of the relationship in nature, an intricate mixture of order and disorder, regularity and irregularity. The art of using the 80/20 Rule is to identify which way the grain of reality is currently running and exploit that as much as possible.
The game is to spot the few places where you’re making great surpluses to maximize them and identify the places where you are losing and move away from those areas.
Unless you have used the 80/20 principle to redirect your strategy, you can be pretty sure that your strategy is flawed. Take a look at your customers, your products, your suppliers, your business processes, and your customer service issues. Take a stab at applying the 80/20 Rule with question slike:
- Which customers and products are accounting for the 80% of our profit?
- What customers are causing 80% of the pain?
- How much profit are the “painful” customers actually generating?
I’ve created a great Excel tool to log problems areas (I initially used it to log billing problems which were ultimately reduced by 75%.) Help yourself and let me know what you discover!