This time I’m going to give the essence – if you like, the 80/20 – of 80/20

THE 80/20 OF 80/20

My last post simplified my (and Greg Lockwood’s) book Simplify – I’m pleased that it was thought useful to many of you.  This time I’m going to give the essence – if you like, the 80/20 - of 80/20.  Here are the 27 things you absolutely need to know about the 80/20 principle:

  1. The universe is wonky! The 80/20 principle tells us that in any population, some things are likely to be much more important than others. A good benchmark or hypothesis is that 80 percent of results flow from 20 percent of causes – and sometimes from a very much smaller proportion of powerful forces.  The 80/20 principle states that there is a predictable, in-built imbalance between causes and results, inputs and outputs, effort and reward.
  2. If most results come from few causes, there is great mileage in isolating the few causes that have the greatest results. For example, it may that 80 percent of what you achieve in your work comes from 20 percent of the effort or time spent.  If this is true – and it usually is – four-fifths of the effort and time is largely irrelevant.
  3. In business, many examples of 80/20 have been validated. 20 percent of products usually account for 80 percent of sales value; so do 20 percent of customers.  Even more vital – a fifth of products and customers typically yield four-fifths of profits.  Companies have far too many products and customers, many or most of which are unprofitable.
  4. The pattern underlying 80/20 was discovered in 1897 by Italian economist Vilfredo Pareto. He was studying patterns of wealth and income in nineteenth century England.  He found that most money went to a small minority of the people in his samples, and that the distribution of wealth was typically the same whatever the time period he took, and whichever country he researched.  He produced an algebraic equation which was remarkably accurate whatever data he examined – the shape of the graph looked the same regardless of the subject studied.
  5. Contrary to what is asserted widely on the internet and even by many reputable authors who should know better, Pareto never used the phrase ‘80/20’. I have been unable to find this used before the 1940s.  Pareto died in 1923.  The 80/20 principle is derived from his work, but it is a simplification he never made.
  6. 80/20 is not a magic formula. Rather, it is an empirical observation – one that crops up time and time again, but not very often in the precise 80/20 distribution.  The distribution may be 70/30 or 90/10 or 99/1, and the numbers don’t even need to add up to 100.  I have seen 80/1 distributions (fewer than one percent of words are used in common speech 80 percent of the time) and a huge variety of other ones.
  7. The value is in looking for 80/20 (or similar) patterns which exist, but which have not yet been detected. For example, 20 percent of the ‘chunks’ of business may give 80 percent of profits and cash – but which chunks?  How are they defined?  You need a hypothesis before you can test it, and the fun is devising a new hypothesis never suspected before, but which works very well and leads you to action that can multiply profits.  In a study I made of a gambling business, I divided customers into ‘chickens’, ‘geese’, and ‘foxes’.  Without giving the game away, I can tell you that the chickens were small gamblers who cost a fortune to recruit and gave very little revenue because they didn’t bet much and lost their money quickly. The company was spending an enormous amount to attract these customers, yet making a huge loss on them.  Stop doing that – and profits soared.
  8. Another vital observation is that very few companies in a market make most of the profits in that market. In 2011 Apple only had a four percent share of cellphones, but its iPhone made more than 50 percent of the total profits enjoyed by all cellphone makers (a 50/4 pattern).  Typically, however, the firms which make the lion’s share of profits in a market are those that have the highest market share.
  9. Segmentation is key to using 80/20 intelligently. For any given firm, few of its products and customers usually make most of the profits – but defining the products and especially customers correctly can be tricky.  One rule that works well as a generalization is that a company’s few ‘star’ businesses – those that have the highest market share in a high growth market – make most of the profits.  This is typically a 95/5 distribution or thereabouts.
  10. Personal productivity follows the 80/20 pattern, both between people, and for an individual. It’s long been known that about 20 percent of sales people sell 80 percent of products, and we are now realizing that in any company probably one percent of people are responsible – if we calculate it correctly – in generating most of its profits.  But for any one person it works as well – if you work in a creative job, a tiny fraction of your time will generate most of the value you provide.
  11. An important observation is that ‘A’ people are the most expensive, but give by far the best value. This never fails.  Firms comprising only ‘A’ people are by far the most successful.
  12. For personal success, specialize in a very small niche – develop a unique, deep core skill.
  13. Choose a niche you enjoy and where you can become an acknowledged leader.
  14. Identify your market and your core customers – those who like you best and give you most of your profits – and serve them best.
  15. Identify where 20 percent of your time and effort gives you 80 percent of your returns.
  16. Become self-employed early in your career. The vast majority of new wealth is created and enjoyed by entrepreneurs and other individuals (performers, sports stars, authors, artists, etc.) who comprise a tiny majority of the total relevant population, but are self-employed.
  17. Very few companies on the stock market create the bulk of new value. Without these the market would bomb.
  18. Happiness can be increased by focusing on very few things and making them daily habits. My personal list of the most important daily habits of happiness – exercise, mental stimulation, spiritual or artistic stimulation, doing a good turn, taking a pleasure break with a friend, giving yourself a treat, eating healthy food.
  19. Perhaps the most important manifestation of 80/20 is the subconscious – aka unconscious – mind we all have. This works away in the background solving our problems and directing us while we are getting on with our lives. Learning to program your subconscious to fulfil your goals and dreams is probably the most important single use of 80/20 for any ambitious individual.
  20. 80/20 is increasingly becoming 90/10 or 99/1 – the principle itself is becoming more pronounced. The reason for this is the increasing prevalence of networks in our lives.  Networks are nearly always 80/20 or 99/1 in the way they operate.  7 out of 10 of the world’s most valuable businesses exhibit strong network effects.
  21. In any given market or category, a very small number of networks will hold sway over a large proportion of activity or business in the market/category.
  22. Networks and their members like and gravitate towards market share concentration and often monopoly. Bigger networks are better networks – they match supply and demand more efficiently and quickly.
  23. If you want to succeed, only work in network businesses, or start your own.
  24. The best type of network to join is one which has just started and is very small, but is growing fast. The faster the better.
  25. Only work for an 80/20 boss – someone who intuitively or consciously uses the 80/20 principle to get extraordinary results with ordinary effort.
  26. Find your 80/20 idea and start a new company based on it.
  27. Become joyfully, usefully unique. Do something you enjoy which is different from what anyone else does.  Accentuate your individuality, so that the most important thing is not what you do, but who you are, and the value you give to other people. We make the world better when we cultivate our individuality to attain results which are fantastic for our customers and those around us.

These 27 observations and hints are drawn from the new edition of my book, The 80/20 Principle.  Print these four pages and display them prominently on your desk – but they will mean far more to you if you read the book.  For sure, it’s a lot more effort, but, trust me, the rewards will be disproportionate too.  80/20 is one of the very few things in life which is a reliable shortcut to success and happiness.

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