This post is about the big bad, mother-of-all wisdom, one ring to rule them all, deep blue sea truths at the core of business and life (not to hype it up or anything).
The 80/20 Rule.
It’s also known as the 80/20 Principle, the Pareto Principle, a Pareto distribution, and the Law of the Vital Few.
The 80/20 Rule is a common pattern that arises in a number of different life contexts whereby a majority of results can be traced back to a small number of critical factors.
Just to name a few examples…
- 80% of a company’s revenue comes from 20% of its customers.
- 80% of sales are due to 20% of products.
- 80% of complaints are from 20% of customers.
- 20% of hazards account for 80% of injuries.
- 20% of the population causes 80% of the crime.
- 20% of investors own 80% of shares.
- 80% of exercise benefits are from 20% of training.
- 80% of global income goes to the world’s richest 20%.
- 80% of a nation’s wealth is created by 20% of its people.
The 80/20 Rule doesn’t apply to everything — it’s not like a universal law of physics. It’s more of a general observation or common pattern that has been noticed to emerge in just about every field, from biology to business.
It’s not always an exact 80/20 split, either. The case may be 70/30, 95/5, or 99/1. The specific numbers are not as important as the discovery of a massively unbalanced ratio.
A related but more casual expression is Sturgeon’s Law:
“90% of everything is crap.”
The 80/20 concept is based on the work of Italian economist Vilfredo Pareto who, in the early 1900s, discovered (among other things) that 80% of a country’s wealth was owned by around 20% of the population. Since then, his work has been used by many individuals and companies showing parallel trends of unequal distribution in business, economics, and other areas of life.
But why is it important?
And (more importantly), how could it possibly be the most important concept… ever?
Understanding that there is a massively disproportionate relationship between causes and effects can have important implications for, well, practically everything.
Here’s a great example for small business owners:
In the classic business best-seller, “The 4-Hour Work Week” (2007), Tim Ferriss describes how Pareto’s insights changed his life. He discovered in his own small business selling supplements that 5 wholesale customers out of 120 were producing the majority of his revenue, while 95% of customers were wasting the majority of his time. Specifically, he discovered he was spending 98% of his time chasing high-maintenance, low-reward customers. An in-depth 80/20 analysis helped him see that two customers were the source of nearly all the unhappiness in his life. Following the realisation that he was simply keeping customers happy for the sake of doing business, he changed his ways.
Ferriss decided to start over by firing his worst customers. He then identified the common characteristics of his top 5 clients and sought out similar profile types. In the end, he went from chasing and appeasing 120 customers to only dealing with large orders from his best 8 clients, who required very little effort. This tactic doubled his monthly income from $30k to $60k in 4 weeks. He went from working 80 hours a week to 15 hours and — most importantly — he went from being severely stressed out to experiencing that elusive emotion which business has its odd way of almost entirely eroding from our lives: happiness.
By recognising that the majority of both good and bad consequences come from a minority of causes, we can focus on those actions that account for the majority of our happiness. This will tend to mean eliminating, delegating, ignoring, or saying “no” to tasks and people in our lives that are the key sources of conflict, ineffectiveness, and unhappiness — anything keeping our eyes off the prize.
Of course, this assumes we know what the prize tasks are.
We might not.
In our marketing strategy sessions we see it’s very common for business owners to target anyone who might be a potential buyer. The Customer Avatar (or Buyer Persona) is often based on a general impression of who the business owner thinks the target market would be — or even who their average customer currently is. However, it’s not the general customer or average customer that is going to result in disproportionately high returns.
The 80/20 rule reminds us that 80% of your business revenue comes from a very small percentage of great customers. If one truly wants exceptional results, then the goal is to develop your customer profile around your most exceptional buyers: identifying common patterns among these top clients, understanding their consumer psychology in depth, finding more of them, and putting the majority of your time and effort into developing relationships with people who are — or have the most potential to be — top-billing mammoths.
“More customers is not the goal and often translates into 90% more housekeeping and a paltry 1-3% increase in income. Make no mistake, maximum income from minimal necessary effort is the goal.”
— Tim Ferriss, The 4-Hour Work Week (2007)
Not all customers are created equal. Some customers are worth 10, 100, or 1,000 times more than others. It doesn’t make sense to spend a whole week responding to emails from 30 customers who are collectively only going to buy $1,000 worth of product during an entire trading year when you could spend the same amount of time finding 1 single customer in the same week who is willing to spend $10,000 or more. (Again, the numbers here aren’t as important as illustrating the underlying principle).
Yet, it’s very common to see business owners diffusing the majority of their time and attention on customers who produce very little return when one’s time could be better spent on smarter effort-reward bets.
In case you feel like this is a personal attack intended to single you out as being uniquely deserving of blame and shame, you’re certainly not the only one in the world who feels they could be getting a better grade on one’s priority management.
If there’s a general blunder almost all of us are guilty of, it’s the error of confusing efficiency with effectiveness, of mistaking activity for achievement, of equating busyness with productivity, of doing things quicker instead of doing the right things.
Too often, we spend our time reactively responding to emails, texts, phone calls, interruptions, meetings, and consuming news media that raises blood pressure when we should be focused on the work that matters. (Ferriss, for instance, advises completely cutting the news from one’s information diet and focusing on only 2 primary goals or tasks per day.)
Business for the sake of business may seem like a particular malady of the modern worker bee, but the essential problem has been around in one form or another since ancient times. The ancient Roman stoic Seneca said:
“For love of bustle is not industry — it is only the restlessness of a troubled mind.”
You can spend hours downloading the latest productivity apps, optimising your calendar, efficiently organising your emails, learning keyboard shortcuts, beautifully colour-coordinating your filing system, and buying the latest time-saving gadgets, but if you’re not working on the right things, you’re only getting nowhere faster.
The father of modern management theory Peter Drucker perhaps said it best:
“There is nothing so useless as doing efficiently that which should not be done at all.”
Arguably the most influential management writer Stephen Covey was of a similar mind:
“Most of us spend too much time on what is urgent and not enough time on what is important.”
Looking at business from the outside, nearly everyone appears busy.
But just because people look busy doesn’t mean they’re doing anything worthwhile.
The question is, when you look under the hood, is it all just fumes and noise?
Is anything really getting done… or is it mostly just impressive-sounding crap?
Picking the right goal is more important than executing swiftly.
Slow but incremental progress towards the right destination is better than moving quickly in the wrong direction.
Making 1% progress on the right goal is better than achieving 100% of the wrong goal.
The 80/20 Rule has become a handy short-hand reference and general reminder to (re)focus our increasingly divided attention on the critical few priorities that actually matter — and not get caught up in the trap of “busywork.”