The 80/20 Principle: The Secret of Achieving More With Less – 20th Anniversary Edition
“A few things are important. Most are not” Richard Koch
In 1897 Vilfredo Pareto – an Italian economist – first discovered the 80/20 rule after looking at patterns of wealth and income in nineteenth century England. At the time he could not have possibly predicted how many ways his principle could be applied. Pareto’s formula has been shown to be true in everything from quality control, the distribution of accidents or crime amongst criminals, and was even used as a focus for the development of early IBM computers.
Author Richard Koch is himself an excellent example of Pareto’s principle – 80 per cent of your success will come from focussing on 20 per cent of your output. Having sold over a million copies of his book – first published 20 years ago and in print in 36 languages – he now lives the 80/20 way, dividing his time between countries and the things that interest him most. Koch started early with this approach. He earned his first class degree from Oxford University by analysing past papers and working out that at least 80% (sometimes 100%) of an exam could be answered well with knowledge from 20 per cent or fewer of the subjects. This efficient way of studying meant he could know an awful lot about relatively little, instead of a fair amount about a great deal. His subsequent fortune was amassed from picking the right investments to start with and then concentrating even more funds into those shareholdings.
In this new anniversary edition, Koch breaks his book into five parts, with the first section explaining 80/20 analysis and 80/20 thinking. The second part looks at how to apply the principles in business, with section three looking at how to work less, earn and enjoy more, including a new chapter on how your subconscious mind can help you. A new fourth section in this special edition discusses how networks (like Facebook, Twitter or Uber and Ebay) have become increasingly prevalent, making the principle even more relevant and more extreme – tending towards ratios of 90/10 or 99/1 rather than 80/20. The final part considers reader feedback and how the author’s thinking has developed since the first edition.
- Always be searching for, thinking about and acting on the 80/20 principle. Whenever you spot a 20 per cent activity, Koch’s advice is to run to it, immerse yourself in it and use whatever resources you have at your disposal to magnify and exploit it
- It is important to understand how to correctly use the 80/20 principle. Koch breaks down the steps for analysing a company’s performance and it’s not quite as simple as it might sound
- 80/20 numbers are only a benchmark and the real relationship may be more or less unbalanced, but in most cases it’s much more likely to be closer to 80/20 than 50/50
- The principle can be used both for analysis – which is precise, quantitative, requires investigation and provides facts. And for thinking – which is fuzzy, qualitative, requires deep thought and provides insight. Both approaches are very valuable
- If you are doing an 80/20 analysis of numbers, bar charts are the best way to show the correlation
- As an example of the principle in action, economists studying the success of 300 films over 18 months at the box office, found that just four movies (1.3% of the total) – earned 80 per cent of box office revenues. The other 296 earning just 20 per cent. Moviegoers tend to behave like gas particles in random motion. Word of mouth, from reviews and first audiences will determine whether the second set of audiences will be large or small, which will determine the next set, and so on
- As well as doing something about the top performing 20 per cent of your results (eg concentrating on keeping your most valuable customers happy) you can look at the underperforming 80 per cent. For example, teachers now try to address questions randomly to students rather than allowing most classroom participation to come from just 20 per cent of students
- It is possible to use the principle in the wrong way. For example, in the book trade, around 20 per cent of book titles account for 80 per cent of book sales. Don’t make the mistake of thinking that you can cut the range of books you offer and only provide bestsellers as this has been shown to send profits down. Customers want a reasonable range of books in a bookstore, otherwise they could go to a supermarket. And profits don’t necessarily correlate with bestsellers. The most profitable books might never make it into the bestseller chart but sell a reliable quantity, year after year, and at high margins
- Apple used the 80/20 principle to deliver the Apple Newton Message Pad, an electronic personal organiser. They found that .01 per cent of a person’s vocabulary was sufficient to do 50 per cent of the things you want to do with a small handheld computer. Technology and quality experts have been successfully putting the 80/20 principle into action for a much longer time than most businesses
- The principle can be used to identify the parts of an organisation (people, factories, sales offices, overhead units, countries etc) that generate the highest surpluses, and reinforce those, giving them more power and resources. And conversely, it can help identify the resources generating low or negative surpluses, support them to gain improvements and, if they are not forthcoming, stopping the expenditure on those resources. However, as Koch points out, we need to be wary in the real world of interpreting the results too rigidly
- Standard accounting systems to identify profitability can help calm and distort figures, with the 80/20 principle rampant but largely unobserved. Ignore it at your peril
- Every business person might think they know where they make the most profits or lose the most money, but Koch believes they are nearly all wrong
While we all may have used lack of time as an excuse for not achieving greater things, Koch says that his application of the principle would suggest the reverse. His view is that we are actually awash with time and profligate in its abuse. Now, more than ever, it may be a wise move to start thinking about where we direct most of our focus and if that’s bringing the results we really want.
About the author
Richard Koch is a highly successful author, investor and entrepreneur, having made large returns from businesses as diverse as MSI hotels, Belgo restaurants, Filofax personal organisers and consulting. A former partner at consulting firm Bain & Co, and co-founder of The LEK Partnership, the fastest growing and most profitable ‘strategy boutique’ of the 1980s, Richard now lives the 80/20 way between Gibraltar, Spain, Portugal and South Africa.
Author: Richard Koch