The 80/20 principle, also called Pareto’s principle, is a life-changing idea that states that 80% of your profits come from 20% of your efforts.
It states that if you were to examine your ventures more closely, you’d find that there are customers who are a lot more valuable than others, and that some of the products or services you are selling are making you a lot more money than their counterparts.
This is true about the negative as well - 80% of your grief stems from 20% of the activities and interactions you have on a daily basis.
The application of this principle is simple and yet profoundly effective- first, identify the areas of your life that are the most profitable, as well as those aspects that are most expensive and/or painful to you.
Once you’ve found these areas, the 80/20 principle suggest that you will most likely find that they stem from just a small percentage of your efforts - a few key actions give you the most profit, and a few others give you most of your pain. It is then your task to do more of that small amount which is effective and minimize as much as possible the elements that do not serve you.
If you find that you have just a few profitable products, don’t give them equal attention -focus most of your efforts on selling those few products. at the same time, consider dropping those things that are not profitable to you in the same way. And when it comes to those negative dimensions of your life - find ways to minimize the 20% that is giving you the 80% of grief in your life or business.
The details of the rule
It is important to understand a few key principles in the 80/20 rule.
First of all, although 80 and 20 add up to 100, the 80 and the 20 are not measuring one dimension of your business - the 20 represents one factor and the 80 represents a different one.
For example, 20% might represent a certain marketing tactic, while 80% represents the total profit to your business. The 20/80 principle is about finding skewed relationships between different factors.
Second, because you are measuring two different elements, and because this entire principle is an approximate statistical rule, the numbers don’t have to add up to an exact 100; You might find it’s actually 17% of your salesmen are bringing in 79% of your sales.
The important thing to realize here is that not all aspects of your venture are equally effective - most of your gains come from a few key activities, and most of your pain comes from a few more. Thus, if you increase these positives and decrease the negatives, you will have a disproportionately large effect on your success and well-being.
Those 20% of your most effective salesmen represent 80% of your profits - a 1:5 ratio of effectiveness. That means that finding just one more effective sales person like them, or finding ways to increase their effectiveness, will have a positive effect on your business at the same disproportionate 1:5 scale.
You might also find that:
The 80/20 principle is a statistical hypothesis that very often proves to be true. Work backwards: take your total profits from your business - let’s say they are 100 million a year. The 80/20 principle suggests that you will probably find a cause that accounts for 80 million of your profits - and that cause is probably only 20% of some larger whole - 20% of your customers, 20% of your products, 20% of your business calendar, etc.
To apply the 80/20 principle to your life and business, break things down by segment and look for disproportionate relationships - analyze your most effective customers, sales tactics, times of sale, type of product, and anything else that comes to mind.
Once you find the disproportionate elements in every dimension of your life and business, purposely neglect the trivial 80%, and focus on the 20 that really matters.
Applying the principle to non-profits
You’ve hopefully understood the key points of the 80/20 principle; I highly recommend you read the definitive book on the subject, as well as Tim Ferris’ inspiring personal example of putting it into practice.
I want to take just a couple moments to apply the principle to the field of nonprofits, which I have been fascinated by, and worked closely with, for a long time.
Most businesses have a straightforward feedback loop - you sell your product to consumers, you make money. Thus, you can examine in a more straightforward way which are the 20% of products, customers, and sales tactics that are giving you 80% of your money.
But as I wrote about in a previous article, nonprofits are more complicated, which is important to note, because they have a non-direct loop - money comes in from donations, and goes out to consumers of their service (who often consume without paying). The result is that to apply the 80/20 principle effectively, a nonprofit has to apply the strategy to two separate areas - their income and their expenses, since these two are not inherently related.
A non-profit should analyze what 20% of donors and fundraising tactics have raised 80% of their funds, and in a separate act, analyze what 20% of their activities are accomplishing 80% of their mission.
The world is a disproportionate place, and not all our ventures and efforts are created equal. But focusing on increasing the key positives and reducing crucial negatives, we can dramatically increase our effectiveness and life satisfaction.
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