The Pareto Principle


According to Wikipedia, The Pareto Principle (also known as the 80-20 Rule, the law of the vital few and the principle of factor sparsity) states that for many phenomena, 80% of the consequences stem from 20% of the causes.

The idea has rule-of-thumb application in many places, but it is commonly misused. For example, it is a misuse to state that a solution to a problem "fits the 80-20 rule" just because it fits 80% of the cases; it must be implied that this solution requires only 20% of the resources needed to solve all cases.

In layman's terms, the 80/20 Rule simply means that the relationship between input and output is rarely, if ever, balanced. When applied to activities, it means that approximately 20% of your efforts produce 80% of the results. Learning to recognize and then focus on that 20% is the key to success and also the key to effective time management.

The Pareto Principle was suggested by management thinker Joseph M. Juran. It was named after the Italian economist Vilfredo Pareto, who observed that 80% of income in Italy was received by 20% of the Italian population. The assumption is that most of the results in any situation are determined by a small number of causes.

This idea is often applied to data such as sales figures: "20% of clients are responsible for 80% of sales volume." Such a statement is testable, is likely to be approximately correct, and may be helpful in decision making. Richard Koch has written extensively on how to apply the principle in all walks of life.

Koch, a former management consultant and entrepreneur took the 80/20 Rule, adapted it to his personal and professional life and wrote a series of books on the topic beginning with 1998's "The 80/20 Principle: The Secret to Success by Achieving More with Less."

Koch has also used his concepts to make a fortune from several private equity investments made personally.

In his second book on the phenomenon, The Power Laws, he discusses the 80/20 principle as a basic principle for how the universe works, and sees the process of evolution, as described by Charles Darwin, as a special case of the 80/20 principle at work.

He also emphasizes that the 80/20 principle should not only be seen as method for making decisions or selections, but it should be combined with W. Brian Arthur's concepts of positive feedback and increasing returns.

In business, the 80/20 Rule can be applied in many different areas. For example:

* Supplies – 80% of your supplies comes from 20% of your vendors.

* Inventory - 80% of your product comes from 20% of your inventory.

* Sales Productivity – 80% of your sales come in from 20% of your sales force.

* Employees – 80% of the work will be done by 20% of the employees.

* Customers – 80% of sales will come from 20% of your customers.

* Complaints – 80% of complaints come from 20% of your customers.

* Advertising – 80% of business from advertising will come from 20% of the advertising.

It's important to keep in mind that the 80/20 rule is a ratio. This means, if the total selection is less, then the total sales will also be less.

The 80/20 Rule can also be applied to websites as well. For example, 80% of your traffic only visits 20% of the pages on your site.

And publishers of "How To" information have known for ages that 80% of those who purchase their products will never utilize the information.

Likewise, 80% of those who attend seminars to improve their lives will never utilize the information they obtained at the seminar.

In closing, Pareto's Principle, the 80/20 Rule, should serve as a daily reminder to focus 80% of your time and energy on the 20% of those activities that are really important. It's not enough to just "work smart", you also need to work smart on the right things.

Good thread Dale.

I believe that if someone simple ran their life/business upon the 80/20 principle they were not only achieve the business sucess they desired but have a lot more happiness too.

Below are a few quotes from the Richard Koch book, "The Natural Laws of Business". I'm honestly astounded by the overal lack of interest on most forums concerning his ideas and the 80/20 principle in general... My guess is that the 80/20 principle doesn't have the "sexiness" of say "Think and Grow Rich" or some of the other self-help classics but I think the "80/20 Principle" by Koch is 10x more useful than Napoleon Hill's stuff.


Richard Koch Quotes-“The Natural Laws of Business”

In this world and wonky world, intelligence, common sense, and good intentions are no guarantee of good results.

Business is a series of related transactions linked together by cooperation, loyalty, networks, serial reciprocity, and reputation, where the richest results require us to forgo our own short-term self-interest in order to cooperate with the best cooperators. It is not the meek that shall inherit the earth nor the aggressive, but rather the cooperative.

In economic development, the market is more important than any particular industry, and the “species” of producers or consumers is more important than any individual firm or consumer. It follows that if any business enterprise or individual is not succeeding a radical change of environment or behavior is necessary.

Any business or individual wishing to win a new market should create a new segment based on greater specialization. Take one market or industry and make it two. The opportunity always exists—it is the way that markets must evolve—and all that is required to realize a new segment is imagination allied to the following simple method. Focus on a subgroup or new group of customers that has some homogeneity internally and some differentiation from the rest of the current market. Next, decide how you can serve that customer group better, so that extra value is created for them, but without a proportionate increase in the cost to supply them, and ideally with a decrease in cost. Typically, this can be done by cutting out or downgrading elements of the product or service that are important to the market as a whole but not to your target customer group. Once you have found your new market, identify techniques and partners from other markets and industries who embody the highest standards of value delivery, who are “highly evolved” economic species. Then appropriate their ideas or make them partners. Finally, aim to become and remain the standard, the model, and the leader in your new market segment.

It doesn’t matter whether you go for a larger or small market, whether you go “up-market” or “down-market”—the key is to go for a different market, and to set the standards for the new market. This is how evolution works.

In business it’s difficult to measure something that customers prefer by a margin of just 1%. But imaging that there is a 10% difference between one firm’s product and another. This will translate into far more than a 10% difference in sales, market share and profits.

Only by reducing costs or improving features or providing other forms of extra value can markets expand faster than other markets. Above average growth is the reward for above-average improvement in delivering value.

Failure implies a lack of fit between the environment and the product.

Hoping that the existing environment will change is the prevalent strategy of failing business.

Your firm needs unique niches, places where no one else can go because they aren’t exactly like you. The “places” can be particular customers, geographic markets, channels of distribution, products, technologies, or any other source of differentiation, but at least one of these must be unique to your firm.

Our genetic predisposition to avoid confrontation can cause us to overlook problems within our midst.

There is an in-built, apparently hardwired, genetic bias toward respect for incumbents that places challengers at a disadvantage. The first one into a market has a distinctive advantage. Perceived ownership is what matters.

If we wish to influence other people, we cannot appeal only to their reason. We must be skilled at baser appeals to their emotions. If we wish to manage people we must manipulate their primitive propensities.

Take more risks. If the upside—value times probability—exceeds the downside, do it. If in doubt, do it.

Thanks, Michael!

Dale King

I honestly didn't read your post in The Secret thread.

However, I'll be happy to tell you how this article came about.

I generally outline topics I want to write about months in advance...and then I write articles in the order that the topics are outlined.

I'd love to give you credit, but it just so happens, it was just this topics turn to get written about.

Dale King