Review: The 80/20 Principle

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Each Sunday, The Simple Dollar reviews a personal productivity or personal development book.

8020The title of this interesting book refers to the Pareto principle, which states that “for many events, 80% of the effects comes from 20% of the causes.” For example, 80% of the happiness in your life comes from only 20% of the events, and 80% of your productivity at your job comes from 20% of the time.

This idea has become a common rule of thumb in business, but one that’s difficult to really maximize and utilize. For example, let’s say that 80% of your business comes from 20% of your customers – should you really ditch the “bottom 80%” of your customers? Most of the example that you think of with the 80/20 rule are rather difficult to implement.

The 80/20 Principle tries to address this whole problem in both business and everyday life, and does a rather good job of it, with a few caveats. Let’s dig in and take a look at what this book can teach us.

Looking At The 80/20 Principle

Part One: Overture

1. Welcome to the 80/20 Principle
The book opens with a really fascinating look at the history of the 80/20 principle, starting off with Pareto’s observation that in many societies, 80% of the wealth is controlled by 20% of the people. Even more interesting, you could take any subset of the population that you wished and this phenomenon was still true – 20% of whatever subgroup you found controlled 80% of the wealth. Eventually, other researchers began to observe this phenomenon in all manner of places, from operating systems at IBM to national GDPs. Interestingly, Koch even goes on to show that the 80/20 principle shows up in a lot of science, using chaos theory as an example.

2. How to Think 80/20
That’s great, but how does one actually use this 80/20 principle in real life? This section doesn’t really address that question, but offers a number of interesting anecdotes on the topic.

Perhaps the most interesting of the lot, and one I’ve noticed while reading a lot of personal finance and personal development books, is that you can extract 80% of the information from most nonfiction books in only 20% of the time it would take to read the whole book. How? Read the first page and the last page of each chapter (or the obvious section that approximates the first page or the last page), and then just skim quickly through the rest for ideas that pop out at you. For personal development books, this is a great way to extract most of the main ideas quickly; you can always go back and read more deeply if you need to.

Part Two: Corporate Success Needn’t Be A Mystery

3. The Underground Cult
This section provides another history lesson, this time focusing on the history of businesses and how that 80/20 rule keeps cropping up time and time again. This is actually as much a piece of persuasive writing as anything else, as Koch paints the 80/20 principle as a great guiding force in the strategy of great businesses. While I do believe there is some strong merit in the principle, I feel that in many cases it’s like herding cats – easy to see but very hard to grasp.

In general, the 80/20 principle seems to be most effectively applied when a business looks at the customers they’re serving and focuses primarily on that 20% that provides 80% of the business, as well as on the providers of assets for their business that follow the same 80/20 split. For the most part, that 80% that lags can generally be cut away for the health of the business. How is that done? The rest of this part of the book focuses in on that.

4. Why Your Strategy Is Wrong
Even though this chapter’s title was highly presumptive, it does make a very good point. It’s worth the time of any business to do an 80/20 analysis of all of their product lines and all of their suppliers. Rank them by the amount that they provide and also by the amount of time you have to spend dealing with them.

With this ranking, some patterns will emerge. You’ll soon see that there are some customers that eat a lot of time and others that eat little time. There are also customers that account for a lot of your revenue and some that account for little of your revenue. When things get interesting is when you look at how these lists intersect. When you find customers that eat up a lot of time and account for only a little of your revenue, eliminate them. Then focus on cultivating the ones that eat up little time but account for a lot of revenue – those are the ones your bread is buttered on.

5. Simple is Beautiful
This chapter takes the next step beyond that analysis, showing that focusing on those best customers simplifies your business greatly. For example, if you focus entirely on your 80% of customers that take up only 20% of your time, you can drastically reduce your staff. Alternately, you can often trim your product lines significantly – if 80% of your sales come from 20% of your product lines, start axeing the slow sellers.

To a degree, I even do this with The Simple Dollar. Occasionally, I’ll analyze all of my posts and see if I can notice which posts have the most comments. If I just focus on that top 20%, I realize that they attract 80% of the comments from readers, so I look for the things those posts have in common. The end result is a better site over time.

6. Hooking the Right Customers
Once you’ve identified your “good” customers – the ones that provide a larger percentage of revenue than the percent of time and assets they consume – the question becomes how you can find more customers like that one, and this chapter offers a lot of suggestions on the topic.

The most interesting one is to believe that your top customers will be aware of other top customers and bring in good business for you, so you should provide amazing service for those best customers, even if it means a bit of loss in the short term. Anticipate their needs and knock them out with brilliant assistance.

7. The Top Ten Business Uses of the 80/20 Principle
This is a strongly business-oriented chapter that walks through several avenues of business application of the principle – things like inventory management – and showed the tremendous business benefits of each one.

8. The Vital Few Give Success to You
The real conclusion? There are a small number of people – customers, salespeople, tradesmen – that provide most of the value to your business. The real key to success is identifying those valuable people and cutting away the chaff.

Independently of the book, I found a very strong application of this 80/20 principle in Jack Welch’s writings. The former CEO of GE used what he called a 70/20/10 rule – 20% of your workers are doing a fantastic job and need to be rewarded, 70% are doing average work, and 10% need to be let go or somehow adjusted. This is a brilliant application of the 80/20 principle, in my opinion.

Part Three: Work Less, Earn and Enjoy More

This is the part of the book that really stood out to me, because it focused on personal applications of the 80/20 principle.

9. Being Free
Most people put average effort into a lot of different things instead of putting superior effort and attention into a lot of things. The end result is an average life – some things are deeply fulfilling, but many things simply aren’t.

Instead, this book proposes that you discard most of the things that you put effort into and instead put superior effort into those things that remain. I have actually done this in my own life – I put a lot of effort into my family and into my work (The Simple Dollar, for an obvious example), and my main hobbies after that are reading, gardening, and playing games. That’s pretty much how I spend all of my time – I don’t do much else.

But how does one really do that? How can a person transform their lives into one focused on a few specific things without getting bored or stressed out?

10. Time Revolution
This was perhaps the most interesting chapter in the entire book for me. It argues that time management is not the ultimate answer for making your time more effective. The real solution is identifying those things you do that are worth doing and eliminating (or passing off) the rest. Then, maximize the time you spend on the things worth doing.

Here’s an example from my own life. I used to follow a ton of hobbies: video games, baseball card collecting, golf, bowling, writing, reading, and on and on and on. I spent some serious time asking myself which hobbies were really valuable to me – or which aspects of each are most valuable. Now I have a few framed baseball cards in my office that I admire, I basically abandoned many of my hobbies, and now I mostly focus on reading, writing, and some video games. Those are the hobbies I focus on because those fulfill me.

11. You Can Always Get What You Want
Are you happier at work or at home? Also, are you happy 80% of the time at work and also 80% of the time at home? No matter what the other conditions of your life are, you won’t be content with things until you are roughly as happy working as you are not working and that you’re happy 80% of the time both at work and at home.

That’s the premise of this chapter, anyway, and it’s one that’s bound to cause some discomfort for many people who read it. For many people, it’s not easy to just reduce the time at work, and many are locked into the idea that they have to work long hours at a job they don’t like to stay ahead. It’s simply not true.

This chapter actually has a lot in common with Your Money or Your Life. Both argue for the same exact idea: your life is more important than money.

12. With A Little Help From Our Friends
80% of the value of our relationships comes from 20% of our relationships. That, in a nutshell, is how the 80/20 principle applies to the lives of most people, according to Koch. What can we draw from that assessment? It pays more to focus on cultivating the most important relationships in our lives.

Koch even goes so far as to give some target numbers: roughly eight personal relationships and seven professional ones. Can you identify the eight most important people in your personal life and your professional life? Build those relationships – make them strong. The others? Build them if there are opportunities, but don’t stress yourself over them.

13. Intelligent and Lazy
Here, Koch applies the 80/20 principle to career development, encouraging people to select a very narrow and specific career that they’re truly passionate about. Everything else largely follows from that, because the people that are passionate rise to the top of their field, and by the 80/20 principle, 80% of the value goes to the top 20% of the people in a field.

Koch offers some career suggestions, most of which fall along the lines of learning as much as you can while young, then moving quickly to self-employment and building from there. It’s not a career path that works for everyone, but I do agree that if you focus on becoming part of the top 20% in your niche, it’s a great path to follow.

14. Money, Money, Money
This chapter was easily the most frustrating in the book, as Koch attempts to apply the 80/20 principle to personal finance, particularly investing. While some of the resulting advice is good (“invest for the long term”), some of it is pretty questionable, like “one should always cut their losses, but never cut their gains.”

This all comes from the idea that 20% of stocks produce 80% of the gains one will get from investing. While this is true, the exact 20% that will net you the big gains is almost random over a given period of time compared to another similar period of time. The market is chaotic – the best way to master that chaos is to diversify widely and hold for the long term.

15. The Seven Habits of Happiness
Here, The 80/20 Principle recommends seven daily happiness habits that every person should practice:

1. Exercise
2. Mental stimulation
3. Spiritual/artistic stimulation/meditation
4. Doing a good turn
5. Taking a pleasure break with a friend
6. Giving yourself a treat
7. Congratulating yourself

These seven things seek to maximize the moments of happiness throughout a day, which makes sense since the obvious application of the 80/20 principle towards personal happiness is to maximize the things you do that make you happy and minimize those things that make you sad. By creating a routine throughout your day that encourages happiness, you inherently maximize the happiness of a day. Very intriguing.

Part Four: Crescendo

16. Progress Regained
This final chapter addresses the political ramifications of the 80/20 principle. Is the 80/20 principle inherently right wing? In many ways, it is – it asserts that any free, unaltered situation will stratify itself with the best rising to the top and that “best” collecting most of the available resources. If you believe the principle to be absolutely true, any redistribution of wealth through welfare and such simply will not work over the long haul. Interesting political philosophy to close a thought-provoking book.

Buy or Don’t Buy?

The 80/20 Principle is intriguing, no doubt, and it can be a real eye opener when you apply the general idea to specific aspects of your life. Obviously, I found Part Three of this book to be the best portion by far, but even it was filled with a big dollop of philosophy coupled with only small sprinkles of tangible, usable ideas.

This book works best as a thought provoker, not a problem solver. The concept of the 80/20 principle can be really insightful, but the generality of the principle makes it very hard to discuss very specific applications of it. The work of applying it – and really figuring out how to apply it – falls to the reader.

That being said, I did find my time reading The 80/20 Principle worthwhile. I spent quite a bit of time contemplating the specific points in the book and, as noted in the review, I’ve started trying to apply it in my own life with some success.

The 80/20 Principle is well worth reading if you don’t expect it to solve all your problems immediately, but just want some insight and food for thought on how you can really maximize your life.

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8 thoughts on “Review: The 80/20 Principle

  1. What about the remaining 20%?

    By focusing on 20% of the stuff that gets 80% of the result, how will the remaining 20% of the result get done?
    Say we have a portfolio and we focus on 20% of the stocks that bring 80% of the revenue. What do we do with the remaining 80% of the stocks that account for 20% of the revenue? Do we get rid of them?

    If yes, the next time we apply the 80-20 rule to our portfolio (where we have got rid of 80% that brought in 20% of the revenues), then we shall get rid of 80% of the stocks which are in the “current top 20%”. Will this rule work when applied iteratively?
    We do not think so, it will lead to a too narrow domain which will cause a disaster!

  2. I haven’t read this book, although after the odd decade or so in business I’ve seen the 80/20 rule often enough to be familiar with it.

    Trent, I think you’re right when you say the 80/20 rule is a though provoker and not a problem solver.

    If we try to use it a a problem solver, we would work at identifying the top 20%, then drop everything else, right?

    Problem is, so much of the 80% is non-separable. It comes with the turf. It can’t be eliminated or even diminished. Just has to be done.

    Can’t get an appointment if you don’t cold-call 50 prospects (suspects?). But 49 calls wasted.

    Can’t fix the customer’s problem machine if you don’t know how it works. But the solution is right there, on page 279 of the manual.

    Can’t perform an appendectomy if you haven’t practiced on a cadaver (gruesome, but that practice didn’t save a life).

    So here’s my long-winded point. A lot of that 80% is still, well, necessary. It still has to get done by someone and sometimes by noone else but you. The Pareto rule could help identify what activities to delegate, outsource or downplay (and which to emphasize), but there will always be low-value activities we all have to do, no matter how big or small our desk is.

    BTW: FIRE, couldn’t agree more. Sometime in the past those dog stocks were once stars. Here in Australia we are experiencing a mining boom. But it won’t last, they never do, and for anyone without some diversity that will be a disaster. Eggs in one basket and all that.

  3. Hi Trent,

    I just wanted to say a quick thank you for this review. Normally I read your reviews and sigh, wishing I had the time to read the books you recommend. With a to-be-read shelf that’s spilling out onto the floor, though, I don’t have a lot of room to add books.

    I think this book would be perfect for me at this time in my life. I’m transitioning from a freelancing career that’s been taking over my life into taking more marketing clients and running a small business blog. These are my 80 percents. I get the most joy and the most money out of those pursuits. The freelancing was great when I was only looking for supplementary household income but it’s getting to the point where it’s not worth it anymore. I think the thought-provoking nature of this book will do it’s job – provoke me to start thinking about how to apply this to my own circumstances and not give me a prefabricated life kit that I could find in dozens of other books.

    As always, great post, and thank you!

  4. Great post! i think i’ll read some of the others. I found it on msnbc. I have been thinking about stuff like this for a while but i didn’t have any of the method for the means. Now i have the method. Also i really like the bit on msnbc about putting away 20% of you money and living off 80%. I have a question regarding it.

    Would this require that i have a 60,000 a year paying job at 20, because that isn’t really realistic. You won’t have a job like that until your at least 25. Right now I only make about 4,000 a year at most because I am still a college student 2nd year age 20. When i start making that kind of money should I invest 25% to catch up?

    Thanks again great post.
    Dan

  5. “The Long Tail,” pretty much shoots the 80/20 principle down.

    “Combine enough nonhits on the Long Tail and you’ve got a market bigger than the hits. Take books: The average Barnes & Noble carries 130,000 titles. Yet more than half of Amazon’s book sales come from outside its top 130,000 titles. Consider the implication: If the Amazon statistics are any guide, the market for books that are not even sold in the average bookstore is larger than the market for those that are ”

    http://www.wired.com/wired/archive/12.10/tail.html

  6. I use this basic principle at work – and it has gained me a lot in terms of the development of my management skills and ultimately my advancement in my company, where I am a corporate counsel.

    The base principle that I use in business is this: 20% of the projects in front of me are going to produce 80% of the results that I am after (the biggest bang for my buck).

    So I spend most of my time and energy focusing on those projects. The rest is just daily grind.

    This is a good topic to blog about.

    ~Oswegan
    http://oswegan.blogspot.com

  7. To a degree, I even do this with The Simple Dollar. Occasionally, I’ll analyze all of my posts and see if I can notice which posts have the most comments. If I just focus on that top 20%, I realize that they attract 80% of the comments from readers, so I look for the things those posts have in common. The end result is a better site over time.

    I donno about this. I think you are conflating posting with enjoyment. Even hit rates, which is among the predominant web metrics doesn’t necessarily correlate to enjoyment.

    encouraging people to select a very narrow and specific career that they’re truly passionate about.

    While this could be emotionally satisfying, IMHO, it is a risky approach. If you did this with html development in 2000, you’d have lost your job with almost no place to go. I know a few guys who are among the best at what they do, and they can’t get jobs. Diversification helps.

  8. I thought the 80/20 rule was that 20% of the people do 80% of the work. This has certainly been true in any organization I have been a part of.

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