The 80/20 Principle

The Secret of Achieving More with Less

Richard Koch
Nicholas Brealey Publishing, 2007
Recommendation
The key to success is “productive laziness,” claims author Richard Koch. Hard work
is an inefficient path to accomplishment because of the “80/20 Principle.” You
achieve about 80% of your results with about 20% of your activities; the rest is
wasted effort. Focus on the productive 20% in order to work less and achieve more.
Koch concisely explains the concept on his first few pages, so the book can seem
repetitive, but the main lesson is clear. If you want to raise profit margins, focus on
the most profitable 20% of your products. If you want to be happier, focus on the
20% of your activities that satisfy you most. Koch includes many useful ancillary
ideas, such as a step-by-step guide to analyzing your business’s profit centers and a
contrarian take on time management. getAbstract recommends his approach to the
self-employed, to workers at all levels who want to better leverage their time and
effort, and to companies seeking to maximize their marketing efforts. As Koch says,
“Even if you are hard-working, you can learn to become lazy.”

Take-Aways
• You achieve 80% of your results with 20% of your work. That’s the “80/20
rule.”
• Focus on the 20% of products and customers that produces 80% of your
profits.
• Reward the minority of employees who produce the most value.
• Improve the performance of the other 80% of products, customers or
employees – or get rid of them.
• Most businesses are ineffective at switching resources from weak to strong
areas.
• Analyze your business by comparing each segment that faces a different
competitor.
• Revise your approach to time management. Don’t try to get more things done;
try to get the important things done.
• Your most-productive activities are usually the ones you most enjoy.
• It’s easier to maximize your 20% if you work for yourself.
• Define the characteristics of your “happiness islands” of time – that is, when
you are most productive.
Summary
Less Is More

In the early 20th century, economic philosopher Vilfredo Pareto uncovered a

powerful secret hidden in economic statistics: Cause and effect are not in balance.
A minority of causes – usually around 20% – produces 80% of results. The pattern
he discerned, now known as “the Pareto Law,” occurs in every area of business: A
fifth of your customers accounts for four-fifths of your “dollar sales value.” And a
few superstar employees, say 20%, are responsible for the majority of your firm’s
productivity and value. The “80/20 Principle” proves pervasive outside of business,
as well. Twenty percent of drivers are responsible for 80% of car accidents. And
20% of criminals commit 80% of crimes.

“The winners in any field have...found ways to make 20% of effort yield 80% of
results.”
Take advantage of this principle to improve your company’s performance and your
personal effectiveness and happiness. Focus on your most-productive actions and
multiply their effects, rather than wasting time and money on unproductive
activities. You’ll create more value with less effort.

Patterns of the 80/20 Principle

To exploit the 80/20 Principle fully, identify your most-productive actions and
resources by using. two complementary techniques: “80/20 Analysis” and “80/20
Thinking.”

“The 80/20 Principle...should be used by every intelligent person in their daily

life, by every organization, and by every social grouping and form of society.”
Make an 80/20 Analysis by gathering data that enable you to measure your ratio of
input to output more precisely. Compile sales statistics on various product groups
or chart certain customers’ spending. Most likely, you’ll find that specific groups of
customers and products produce more than their share of value. Act on these
findings two ways:

1. Magnify the contributions of the 20% – Focus your sales efforts on the
most profitable 20% of your products. Or, strive to keep your top 20% of
customers happy instead of diluting your efforts by treating all your customers
equally.

2. Improve the less valuable 80% – Cut costs or raise prices on

underperforming products. Introduce products with wider appeal or target
sales to underserved customer groups. For instance, women account for most
of the sales in shopping malls. Reach more men by installing stores targeted to
 them. Trying to improve the lagging 80% is more difficult, less efficient and
generally provides smaller returns than concentrating on the 20%.

“The 80/20 Principle asserts that a minority of causes, inputs or effort usually
leads to a majority of the results, outputs or rewards.”
Sometimes you don’t have time to gather data because you have to make a decision
right away. And sometimes you don’t have measurable data. For example, how do
you quantify the happiness you derive from your hobbies or friends? In such
situations, the 80/20 Thinking approach proves useful; it resembles the 80/20
Analysis, except that you estimate ratios rather than measure them. Using
estimates or intuition can lead to error, but you are on more certain ground with
80/20 Thinking than with conventional thinking where you consider averages, not
ratios. As a result, you’re more likely to overlook the fact that some variables matter
more than others.

Cultivate Your Most-Profitable Segments

Use the 80/20 Principle to improve your firm’s profitability. First, compile an
accurate picture of where your company is making and losing money. Inspecting
overall sales averages won’t help. Instead, compare the profitability of individual
product lines or, even better, the profitability of your company’s “competitive
segments” – the portions of your business that face different competitors. In most
firms, 20% of these segments will bring in 80% of the profits. The other 80% will
consist of less-profitable segments and possibly some losers.

“Successful marketing is all about a focus on the...small number of customers who

are the most active in consuming your product or service.”
Make the most-profitable segments your top priority. Redeploy management and
sales staff from lower-performing areas to the 20% segments. Strive to sell more to
your existing customers in that segment and to attract new customers. Because
your margins are high in this area, you may boost your competitive position by
cutting prices or offering more services.

“A firm that finds that 80% of its profits come from 20% of its customers
should...concentrate on keeping that 20% happy and increasing the business
carried out with them.”
Don’t be too “linear” about this approach. Take a tip from chaos science, and
remember that the connection between cause and effect is not always a straight
line. The data you’re looking at are like a “freeze frame”: one moment in an ongoing
process. As a result, an “obvious” solution – such as jettisoning a money-losing
segment – may be no solution at all. Analyze that segment, and discern why it’s
losing money. A poorly performing segment might be garnering substantial
revenues. It might look bad on paper but still be productive. It might be a new
division whose start-up costs consume its profits. If it serves an attractive market,
this segment could eventually turn into a winner.
Nurture Your Best Customers

Apply the 80/20 Principle to your customer relations. You earn most of your
profits by selling to a small group of your top customers, so focus your efforts on
them. Figure out how to sell them more. Lavish so much attention on them that
they become customers for life. These four steps help you “lock in” your best
customers:

1. Find your top 20% consumers – Before you can give something extra to
your best clients or “channels of distribution,” you have to identify them.

2. Provide “outrageous service” – Don’t just meet their needs; exceed their
expectations and astonish them. You can’t afford to give this kind of TLC to all
your customers, so reserve it for your best.

3. Innovate for your best customers – The most efficient way to gain
market share is to sell more to current customers. Anticipate their needs, and
design new products and services specifically for them. Involve them in
product development.

4. Win their loyalty – Long-term customers drive profitability. Efforts to keep

them may increase costs in the short term, but will boost long-term profits.

Reward Your Best Employees

Apply the principle to your members of staff. In most organizations, 20% of

employees produce 80% of the value. You’ll notice this most clearly in your sales
force because their performance is the easiest to measure. Make the most of your
top representatives with the following strategies:

• Hold on to them – Keep your superstar employees happy. Reward them in

proportion to their contribution, and reserve training for those who can make
best use of it.
• Analyze their success – Identify the traits and techniques that make these
people successful. Examine their training and processes. Hire more people
with those traits and get everyone else to adopt their techniques.
• Switch teams around – Let a top team take over a lagging segment, and put
an average team in a high-volume segment. If the top team flounders, it could
be a sign of structural problems in the segment.
• Analyze winning streaks – The top 20% of salespeople generate most of
their sales in 20% of their time. Figure out what they did differently during
these “lucky streaks” and amplify it.

Individual 80/20
The pursuit of happiness is a quest for the top 20% of factors that add to your
contentment. Twenty percent of your personal relationships are the most fulfilling;
20% of your leisure activities are the most fun and satisfying; and 20% of your time
is the most productive. To work less, accomplish more and have more fun doing it,
unleash the power of the 80/20 Principle in your personal life.

“Business organizations and individuals are generally...poor at...shifting

resources from where they have weak results to where they have powerful
results.”
To achieve these benefits, consider your life with care. This level of 80/20 Thinking
should be:

• “Reflective” – Slow down. Take the time to figure out what’s most important
to you and to seek out the small variables that produce the greatest impacts.
• “Unconventional” – Ordinary thought patterns lead you to waste time on
unimportant issues and efforts. Thinking eccentrically is the first step away
from obviousness.
• “Hedonistic” – Keep an eye out for things you enjoy. Success flows from
your satisfaction and the pleasure you get from your work.
• “Optimistic” – As you examine areas of your life that are unsatisfying,
believe you can change things for the better.
• “Relaxed” – Conventional thinking sees achievement as the fruit of hard
work and sacrifice. Don’t fall into the trap of being pointlessly busy. Stay
relaxed, take your time and focus on the “vital few” causes.

“80/20 Thinking requires, and with practice enables, us to spot the few really
important things that are happening and [to] ignore the mass of unimportant
things.”
Start your reflection with a simple exercise. List your “achievement islands.” These
are the brief periods when you accomplished more than you usually do. Identify
what made these periods so productive. Usually you’ll find that you were doing
things you enjoy that contribute meaning to your life. On a separate page, list your
“achievement desert islands,” the dry spells when you may have been busy but you
felt like you were spinning your wheels. Why did you feel that way? Typical reasons
include doing things you don’t want to do and doing things the way they’ve always
been done.

“Find your niche. It may take you a long time, but it is the only way you will gain
access to exceptional returns.”
Expand this exercise to cover more of your life by identifying your “happiness
islands” – the times you were happiest in your life – and your “unhappiness
islands” – the periods when you were miserable or neutral.
When you finish your lists, reflect on how to multiply the 20% batches of
achievement and happiness. It’s not as simple as copying your most-effective
activities or recreating the circumstances of your peaks of happiness and
achievement. These exercises aim to boost satisfaction and effectiveness by
revealing what you like to do. Analyzing the most appealing portions of your job
could even point to a new career that involves more of that kind of task.

Time and the 80/20 Principle

A common complaint about modern life is that no one has enough time to get
everything done. A whole time-management industry has sprung up to help people
cram more activities into the day. This premise assumes that time is scarce and you
must embrace speed to manage this insufficient resource. The 80/20 Principle
turns this idea on its head because it recognizes that only 20% of your actions lead
to 80% of your accomplishment. If only a fifth of your time is productive, there can
hardly be a shortage of it. Utilize these tactics to get more out of your time:

• Embrace “productive laziness” – Spend less time doing busy work and
more time analyzing situations and identifying your most-productive steps.
• Have fun – To ensure that you spend your time in a valuable way focus on
doing things you enjoy, which are usually things you’re good at. Such tasks
produce greater returns than chores you find tedious. Most self-made tycoons
built their wealth by doing things they liked to do, so seek a way to turn your
pleasures into your job.
• Own your time – Much of the unproductive 80% of your time may go
toward work you do at the behest of other people. If you can’t be self-
employed, approach your tasks with the mind-set of an independent
contractor. Don’t try to eliminate all your obligations, but choose each
obligation wisely. “What we must do is to plant firmly in our minds that hard
work, especially for somebody else, is not an efficient way to achieve what we
want.”
• Use time eccentrically – The conventional view of time – that you have to
fill it with activity – is the main contributor to the wasteful 80% of your
activities. You are more likely to use time productively if you use it
unconventionally. British Prime Minister William Gladstone, a Victorian
politician, derived much of his effectiveness from a highly unusual use of his
time. Instead of burying himself in political responsibilities, he took time to
travel, attend the theater, read widely and socialize.

“Most things always appear more important than the few things that are actually
more important.”
Cull your unproductive activities and concentrate on the productive ones. Set a goal
of increasing your productive time to 40%, twice the normal amount. Following
that rubric, you theoretically could work only two days a week and accomplish
more than you do now.

About the Author

Richard Koch is an investor and author. He worked as a consultant at The Boston
Consulting Group and Bain & Company, and co-founded The LEK Partnership, a
strategy consultancy.