Not all customers who visit our outlets give us all the revenue. In fact, the hidden secret is that 20 percent of the work that we do in a day yields 80% of the results. The same applies to our customers.
Genre(s) : Non-Fiction, Self-Help
20% customers, on an average, give us 80% of the revenues. Now you’d say how did this principle come about? Well, for that you must read this book that opens our eyes to a whole new dimension of efforts and outcomes. It shows us how we can focus on that 20% of the effort, time and resources to yield maximum outcomes. This ratio is normally called the Pareto Principle, developed by economist Vilfredo Pareto while working at the University of Lausanne in 1896. Management consultant Joseph Juran developed it in context of quality control and improvement and named it after Pareto. This book by the same name is written by Richard Koch and is one book which you should not just read but also practice in real life.
Koch wanted to explain this principle where there is a clear lopsided relationship between input and output. Way back in his time, Pareto found a correlation between the number of people and the proportion of wealth that they enjoyed and found roughly the same ratio- 20% of the people enjoyed 80% of the wealth. The pattern, to his surprise, repeated across sectors and across timelines. It was upto the people, the industrialists, the engineers, the businessmen to make use of this pattern for their advantage. It was IBM that first noticed this trend. They found that 80% of the computer’s time was utilized in fulfilling 20% of the commands and they quickly rose to make that 20% more efficient.
Why is the principle so effective
Mainly because it is counterintuitive. We expect that normally all our work will yield to outcomes which is not true. We falsely assume that if we put 50% of efforts, it will yield 50% of the results. On the contrary, resources that we spend a lot of money and efforts may yield very less output while a few key resources may give us the maximum output. Then when you can identify which are those resources that give us the maximum output, why not focus on developing them rather than doing so for all the 100% of the resources? This principle is also effective because it is in sync with the chaos theory. Both these theories suggest that the universe is not balanced and linear. Cause and effect are rarely balanced and equal. Ex. A firm that brings about a product that is 10 percent better than the competition may rake in 100 to 200 percent hike in market share, even if the competitors soon come up with a better version.
Where can I apply the 80-20 principle
The author suggests come good avenues to apply this principle
- celebrate exceptional productivity, rather than raise average efforts- so important for employers
- look for the short cut, rather than run the full course – save time effort and money
- be selective, not exhaustive – think buying art and fashion
- strive for excellence in few things, rather than good performance inmany – forget being jack of all trades, just be a master of some
- delegate or outsource as much as possible in our daily lives and beencouraged rather than penalized by tax systems to do this (usegardeners, car mechanics, decorators, nannies, cooksand other specialists to themaximum, instead of doing the work ourselves)
- only do the thing we are best at doing and enjoy most- rather than spending ourselves thin in doing everything that comes along
Apart from this, Koch also looks at it from a business angle – to generate most money by employing least efforts and resources. What he stresses upon is that knowing what matters is more important if we want to make the most of life.
- Identify which efforts yield how much results and focus on them, rather than spreading yourself too thin
- Hard work, equal work for equal output are myths. The world does not work on balance of input and output
- Focus on those efforts, those relationships, that time that matters the most and reap maximum results
- Those few events of our lives have a profound impact on us, not all. Doesn’t mean that we must stop doing unimportant things altogether, just that put most efforts into what matters the most.
Why I recommend this book
Because, for one, it puts conventional wisdom on its head. It allows you to think beyond the obvious, when it comes to business, life, relationships, time and spending money. I urge you read this book because no one tells us in clear terms how to use wisdom properly. Nuggets like these come in handy and give us an AHA moment!
Further reading: Check out my post on uneven distributions which is also an example of the 80-20 Princinple. .
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