The 80:20 Principle

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The 80:20 Principle

The 80:20 Principle was discovered more than a century ago by Italian economist Vilfredo Pareto, who found that patterns of wealth and income in 19th century England followed a constant mathematical relationship: 20 percent of the people enjoyed 80 percent of the wealth.

Similar mathematical relationships have been found since in everything from beer sales to quality control to writing computer code and so the 80:20 rule has become a tool for understanding the importance of leveraging the power of the vital few.

The 80:20 principle highlights the fact that a few forces in business and life have an influence way beyond their size. By recognizing such key forces, and leveraging them, entrepreneurs and businesses can make significant gains. The balance won't always conform exactly to the 80:20 relationship - although a surprising number match or come close to that pattern.

The 80:20 Principle in Action

One of the prime uses of the 80:20 principle has been in efforts to boost sales. Most companies get an inordinate amount of their revenue - or income - from a select group of people. If 20 percent of customers provide 80 percent of revenue, then companies need to devote extra attention to understanding and satisfying such customers.

The other 80 percent may be a drag on profitability and the company needs to figure out what efficiencies can be developed to serve them, or how knowledge gained from dealing with the top 20 percent of customers might be applied to the others, to make them better customers. Some companies even choose to winnow down their customer base - eliminating some of the 80 percent - in order to concentrate more effectively on the bountiful 20 percent.

The 80:20 rule can also be applied to time management, as you discipline yourself to concentrate more on the vital few activities that provide the biggest returns. Of everything you will do today - or this week - what are the vital few that will have the biggest impact? How can you carve out more time - or better time - for them?

Another way to think about it is: If 20 percent of this week's (or month's) activities will provide 80 percent of the benefits generated for your company by your work, what activities would those be - and how can you re-arrange your schedule and delegation to others to be more effective at them?

In a more recent book, The 80/20 Principle, Richard Koch offers the following top ten business uses for the 80:20 concept:

Strategy,
quality,
cost reduction and service improvement,
marketing,
selling,
information technology,
decision making and analysis,
inventory management,
project management, and,
negotiation.

For example, he stresses that in negotiations "twenty percent or fewer of the points at issue will comprise over 80 percent of the value of the disputed territory." Some people try to win every point at issue. Savvy negotiators hone in on the vital few.

Leverage Time and Money

Thinking about the 80:20 principle can help your business. 8020 Info Inc., as our name would suggest, is sensitive to these issues and where appropriate will employ it in helping you to build your business. But our name comes from a more fundamental 80:20 approach: we provide tools and knowledge that leverage the limited time and money of small businesses, so powerful gains can be made without the huge investment that traditional consulting demands.

If you would like more information on how this principle apples to your organization, please contact us.