What is the 80-20 Principle
One of the exciting principles that one learns at an MBA School is called "The Pareto Principle", also known as the 80-20 principle. This rule has been discussed so exhaustively that it has lost its charm even before its actual utility.
This 80-20 principle, in simple words, tells that 80% of the results come from just 20% of the action.
Respect to Pareto
Vilfredo Federico Damaso Pareto is the person behind the 80-20 Pareto principle. Born in Italy in 1848, he was an influential philosopher and economist. Legend has it that he noticed that 20% of the pea plants in his garden generated 80% of the healthy pea pods.
This observation caused him to think about uneven distribution. He thought about wealth and discovered that 80% of the land in Italy was owned by just 20% of the population. He investigated different industries and found that 80% of production typically came from just 20% of the companies.
Some examples of the Pareto Principle
20% of criminals commit 80% of crimes
20% of drivers cause 80% of all traffic accidents
80% of the pollution originates from 20% of all factories
20% of the vocabulary constitutes 80% of our conversation
20% of the customers take up 80% of the time at the service outlets.
20% of a company's products represent 80% of sales
20% of employees are responsible for 80% of the results
80% of our time we spend in the 20% of our space in the house
20% of our clothes are used 80% of the time
80% of the time, we use 20% of the App on our smartphone
20% of students have grades 80% or higher
80% of our life we spend with the same 20% of the people
80% of bugs can be solved by fixing just 20% of the problems that cause bugs
80% of problems originate from 20% of projects.
20% of the sales reps generate 80% of total sales.
20% of customers account for 80% of total profits.
20% of patients account for 80% of healthcare spending
Is the 80-20 principle a thumb rule?
This "rule" is a precept, not a hard-and-fast mathematical law. Although the 80-20% principle is so close in most of the observations, It should be noted that the 80/20 principle is a simplification. In reality, the ratio tends to differ – for example, it could be 70/30 or 99.9/0.01. However, it is seen that 80-20 is the best approximation one can add up to while making all the rational decisions.
Companies and 80-20 principle
"What is important is rarely urgent; what is urgent is rarely important."
80-20 principle is proven to help companies succeed by counterintuitive means: not by doing more, but by doing less.
For example, it has been seen that while ranking a company's products by profit and sales figure, it has been seen that 20% of a company's product range actually accounts for 80 per cent of their profits.
A broad range of products requires, among other things, more complicated logistics, more training for salespeople and a lot more administrative work than a narrow range. These factors increase the overall cost to the company – possibly even more money than the additional products bring in.
So, by eliminating the additional not profit-making products from its portfolio, the company gets the advantage of letting go of the baggage and gets an opportunity to implement economies of scale of the prevailing product, thereby further minimising its cost maximising its profits.
It has also been seen that in companies, 20% of the marketing efforts represent 80% of the results. So, identifying the revenue-generating marketing channel and the marketing personnel is the right way to forge ahead by allocating maximum resources there.
Companies also realise that 20% of their customers are responsible for 80% of their revenue. In fact, the latest CRM is utilised to identify who these 20% customers can help the company get invested more in them in terms of service and offerings.
Luckily, the 80/20 principle is so versatile that you can use it in virtually any area or function of the business to increase the likelihood of success.
Some examples of companies utilising the 80-20 principle
Ben is the owner of a small business that has gained popularity over the past year. Ben uses the 80/20 rule to discover that nearly 15% of the restaurant's hours yield 85% of revenue to optimise his restaurant hours. This 15% indicates that his peak hours are between 7 and 9 p.m. Ben decides to extend his dinner service by one hour to increase revenue during peak hours potentially.
Abby is a hairstylist looking to expand her clientele. She uses the 80/20 rule to discover that 80% of her new clients were referrals from 20% of her existing clients. Abby utilizes this word-of-mouth advertising strategy and offers discounts to clients who refer people to book appointments with her. This plan can help her increase revenue, improve relationships with clients and focus her time learning new styling techniques.
Applying 80-20 principles and changing your life
One can apply the 80-20 principle to increase happiness and satisfaction in their personal life. All they need to do is to adopt the right 80/20 mindset.
80-20 principle in professional life
Most people spend a lot of time doing things in the office that makes them unhappy. For example, a lot of people have jobs that make them miserable. Most office workers spend their days sitting in a cubicle, mindlessly performing tasks and waiting for the day or week to end.
If you achieve 80 per cent of the results with just 20 per cent of the effort you put in, it means that 80 per cent of your work is egregiously inefficient.
Just imagine: If you could cut out this wastefully spent time and replace it with the things you do during the efficient 20 per cent, you would be multiplying your work results.
Most people don't know which of their tasks are the most important and wind up defining some 60 to 70 per cent of their to-do list as "high priority."
The result? They end up with jam-packed schedules and long working hours. Clearly, forcing even more tasks into an already packed schedule is not a good solution, as you can easily become overworked and, in the worst case, suffer burnout.
As an alternative, 80/20-time management helps you first identify the 20 per cent of your tasks that produce 80 per cent of the achievement and then focus on them.
Have you ever looked back on a project you worked on and found that most of your work was done right before the final deadline? Perhaps in the few days when you were almost out of time, you achieved more than in all the previous weeks put together.
For example, imagine if you could reproduce the last-minute efficiency you have as a project deadline approaches and sustain it for the entire length of the project.
Identify the tasks and responsibilities that are most important, and that will produce the most results if you handle them personally. Anything else should be delegated or eliminated from your schedule.
80-20 Principle in Personal Life
When it comes to living a good life, simplicity is key.
But what is a good life anyway? Philosophers have spent centuries debating this question.
The 80/20 principle says that 80 per cent of what we want is generated by 20 per cent of what we actually do. In other words, if you figure out what you want and focus on what makes you happy, you'll be able to create more with less.
Keep in mind the 80% you can discard, rethink, or transfer to make your life easier. For example, how about deleting the apps you don't use on your phone? How about giving a purpose to the majority of clothes we don't wear? Unsubscribe to 80% of your newsletters since we tend to really use only 20% of them, and so on.
Ask yourself, which 20 per cent of your life provides you with 80 per cent of your happiness and vice versa? Once you define the 80 per cent of your life that creates very little happiness, it is time to take action: simply decrease the time you spend doing those things.
You can do that by reducing the amount of time you spend with things that don't give you the majority of results (or even happiness) and increasing the amount of time spent on the projects that give you more results and are your passion projects.
80-20 Principle in Relationships
Conventional thinking is linear and assumes that all causes and inputs are equally important.
For example, as children, we are taught that all of our friends are equally valuable to us. In this scenario, 80/20 thinking would acknowledge that not every relationship is as valuable. Some of our friends are more important than others, and the relationships we have with them are more meaningful.
You could say that 20 per cent of your friendships produce 80 per cent of the "value," meaning, for example, the feelings of joy and camaraderie that you get out of those relationships.
80/20 thinking would recommend that you go for quality, not quantity, and focus on deepening that most valuable, meaningful 20 per cent of relationships.
Steps to apply 80-20 principle @ Home
1. Make a list of the ten things you spend the most time on.
2. Circle the two that truly drive your personal life results. Do more of those.
3. Look at the others. Eliminate ruthlessly. Automate or outsource what you can. Press pause on the rest.
Steps to apply 80-20 principle @ Work
1. Identify all your daily/weekly tasks.
2. Identify key tasks.
3. What are the tasks that give you more return?
4. Brainstorm how you can reduce or transfer the tasks that give you less return.
5. Create a plan to do more that brings you more value.
6. Use 80/20 to prioritize any project you're working on.
7. Set a plan to focus on activities that produce the most results.
Personally, I am a big believer in the 80-20 principle. I hope it changes your life for the better, just the way it did for me. Cheers!!!