The 80/20 Principle

The 80/20 principle is essential for solid strategic thinking, because it allows you to achieve a lot with minimal efforts, provided you focus on the critical few factors. This popular principle is a good example of non-linearity. Its basic tenet is that a large number of effects are usually produced by a small number of causes—roughly 80% of effects by 20% of causes.Thus, it is often possible to achieve a lot with minimal efforts, and conversely, it is possible to address a large number of factors and achieve almost nothing if your efforts are directed at the trivial many.

The 80/20 principle is ubiquitous. For example:

  • 80% of profits are generated by 20% of products
  • 80% of product sales are generated by 20% of sales force
  • 80% of errors are caused by 20% of factors
  • 80% of wealth is owned by 20% of people
  • 80% of crimes are committed by 20% of criminals
  • 80% of your personal happiness comes from 20% of people
  • 80% of your personal unhappiness comes from 20% of troubling people
  • 80% of meaning is derived from 20% of activities

Of course, the actual ratio is never precisely 80/20; still, often it is close to this ratio—it may be 75/25 or 90/10 or even 95/5. The 80/20 principle is sometimes also called the Pareto principle, after the Italian economist Vilfredo Pareto, who first observed this ratio in his garden, seeing that 20% of his peapods produced 80% of peas. Pareto also found the similar distribution of the land ownership, with a small percent of landowners owning majority of the land. In 1950s, Joseph Juran popularized the 80/20 principle primarily for quality control. [1] In recent decades, the 80/20 principle has experienced a renaissance, thanks primarily to Richard Koch’s books.[2]

The 80/20 Analysis

The 80/20 principle suggests that you can achieve large results even with small efforts, provided you target the few critical factors. Conversely, investing large amounts of effort may yield minimum results if it focuses on the trivial many. For instance, catching 80% of criminals may be not so spectacular achievement if the only ones who are caught are the 80% who commit the 20% of crimes; so catching these 80% would reduce the overall crime rate only by 20%.

All of this suggests that you can achieve exponential success by correctly identifying the few critical factors and then investing your energy into those factors.

The 80/20 Marketing

In marketing, the 80/20 principle can be used to identify and target the type of customers or clients who are already highly motivated to buy your products or services; such people usually require little convincing and they also tend to buy more. [3] A recipe for failure, on the other hand, is to target the trivial many—those who are not motivated to buy, who require a lot of time and energy persuading, and who buy small amounts. Of course, it is equally valuable to cut the 20% of factors that are responsible for 80% of losses, such as those few clients who are responsible for only 20% of profits but 80% of anxiety and financial losses.

Notes

  1. Joseph M. Juran, Quality Control Handbook (McGraw-Hill, 1951).
  2. Richard Koch, The 80/20 Principle (London: Brealey Publishing, 1997)
  3. Perry Marshall, 80/20 Sales & Marketing (2013)