Author: Richard Koch
_Richard Koch_
Reading time: 26 minutes
Synopsis
The 80/20 Principle says that 80% of results often come from only 20% of the work you do. Richard Koch now applies this idea to many different parts of life. This book, The 80/20 Principle (1998), shows how a bit of thinking, guessing, and looking at ourselves can use this rule to give us more profit, make us more productive, and bring us more happiness.
If you want to make any area of your life better, Koch’s new ideas and expanded view of the 80/20 Principle are perfect for you.
What You Will Learn: More Success with Less Effort.
When Richard Koch was a student at Oxford University, his tutor gave him unusual advice. He told Koch to skip lectures and instead read books in a smart way, because it would be faster. He advised Koch to read only the introduction and conclusion carefully. For the rest of the book, he should quickly look for the most interesting parts. The idea behind this advice was that 80% of a book’s important ideas are often hidden in just 20% of its pages. So, you could save time by skipping the rest.
Koch really liked this idea and learning method. Later, in his work life, he kept seeing a similar pattern between effort and results. This made him study the 80/20 rule, which economists had already written about. He found that you can use it in business with 80/20 analyses. You can also use an 80/20 mindset to make your personal life better.
In these summaries of the book, you will learn:
- where the 80/20 Principle came from,
- how to do an 80/20 analysis for your business, and
- why you need a “Time Revolution” instead of time management.
Blink 1 – Most Results Come from a Small Part of the Effort.
In 1897, an Italian thinker named Vilfredo Pareto studied how wealth was shared in Italy. He found that about 80% of the land was owned by only 20% of the families. From this, he thought that banks should only focus on these 20% of families. He did more research and saw that this pattern was not rare. It was a clear imbalance in how wealth was spread. So, this Italian is known for discovering the 80/20 Principle. It is also called the Pareto Principle.
The principle says that often, 20% of your effort is needed to get 80% of the result you want. It’s rare for 50% of our work to bring 50% of the success. This is because not every cause has the same effect on our results. Instead, causes can be put into two groups: a small number that have a big effect, and a large number that have a small effect.
After Pareto, other smart people studied this principle further. George K. Zipf, an American linguist, created the “Principle of Least Effort” from it. This principle says that living things always try to find the easiest way to get a result with the least amount of work. Also, in the 1950s, American engineer Joseph Moses Juran used the “Rule of the Vital Few.” This rule became key to a quality revolution, which helped Japan’s economy grow strong.
No matter what we call it, the 80/20 Principle is everywhere. 80% of results or effects come from 20% of the causes or work. Let’s look at it in traffic. About 20% of motorcyclists cause 80% of accidents. Not every motorcyclist drives drunk or carelessly. So, the chance of causing an accident is not the same for everyone. Here too, we can divide the causes (the drivers) into two groups. One group, the majority, has few accidents. The other group, a minority, is responsible for 80% of accidents.
We also find this principle in our language. In the late 1800s, Sir Isaac Pitman, a British English teacher and inventor, found something interesting. He saw that about 700 English words make up two-thirds of daily conversations. If you add words that come from these, less than 1% of all words make up 80% of what we say every day.
A study in 1997 also showed this. Out of 300 movies released in 18 months, only four movies (1.3%) made 80% of the sales.
The 80/20 Principle helps us understand a common pattern. The numbers are just a guide, and real life can often be different. The ratio might be 70/30 or even 99.9/0.01. Also, the numbers don’t always have to add up to 100, as the last two examples showed.
Blink 2 – The Two Ways to Use the Principle Are 80/20 Analysis and 80/20 Thinking.
Many people think that there is a balance between causes and effects in the world. But this idea stops them from seeing clearly. If you understand the 80/20 Principle, you can understand your daily life and your surroundings much better.
Sometimes this imbalance seems unfair. But the sooner we change our way of thinking to match this principle, the better. There are two ways to use the 80/20 Principle: 80/20 Analysis and 80/20 Thinking.
80/20 Analysis is a way to measure things exactly. It helps you find the precise link between effort (or cause) and the result (or profit). So, it is a scientific method that needs a lot of research, clear facts, and exact data. In the end, it gives you a precise result like 50/50 or 70/30.
Let’s imagine an example. Think of 100 friends who sometimes go for a beer. We compare how much beer they drank last week. To do an 80/20 analysis, you list the answers from the highest amount to the lowest. This way, you can easily compare the percentages and data. Depending on the group, we might see that 70% of the beer was drunk by 20% of the friends. This gives us a 70/20 ratio. If you own the pub, you can try to get these 20% heavy beer drinkers to become regular customers.
The second way to use the 80/20 Principle is 80/20 Thinking. This does not use exact numbers, specific data, or guesses that need testing. Instead, it’s about using the principle in daily life based on feelings and estimates, not numbers. You think about what few important things in life bring the biggest results. For 80/20 Thinking, in everyday situations, we keep asking ourselves: “What are the 20% of things that will lead to 80% of the results in this case?” Then, we take steps to focus more on those 20%. 80/20 Thinking works when you become more effective.
But you will learn more about that later. For now, let’s look at 80/20 Analysis. As a business owner or planner, you can use it in your company to increase sales.
Blink 3 – An 80/20 Analysis of Your Products Can Bring More Profit.
We have now learned where the 80/20 Principle can be used in theory. Now, let’s look at how businesses can use it in a real way. For every business, some markets or parts of the market bring in more money than others. The same is true for products and customers. Some bring more sales, others less. Usually, this follows an 80/20 pattern. If you wisely change your business plan, you can use the 80/20 Principle to increase your sales.
To do this, perform an 80/20 analysis. Look at how and with what you make the most profit. Use these business categories:
- Products
- Customers
- Regions/Sales Channels
- Competitor Segments
List your products, put them into groups, and arrange them by their current sales numbers. This helps you find your most profitable 20%. For example, Richard Koch studied a company that made industrial measuring tools. It showed that their top three products, which made up 19.9% of total sales, actually brought in 52.6% of the profit. This is not exactly 80/20, but it’s close. Other things like advertising and selling costs also play a part.
You do something similar for customers. You divide them into groups, like direct buyers or resellers. You also look at what these customers have in common. For example, you might look at how much they are willing to pay. Or, how much work and effort they cost your staff.
You also do careful analyses of your sales regions and channels. But looking at competitor segments gives the most insights. These are the parts of your business where you compete with another specific company. Or where certain rules of competition apply. In the end, each segment will have a different competitor or different competition. You can then see how sales are spread across these segments.
The second step of 80/20 Analysis is to use the full potential of these profitable 20%. Once you know which products bring you the most profit, you can act on this. Your company should focus its work on these products and get the most from them. For example, you can tell your sales team to double sales of the top products and not worry about the other ones. Other steps could be to get more customers from your most profitable group. Or, spend more time on the market areas that bring in the most sales.
Blink 4 – Use the 80/20 Principle to Improve Many Business Areas.
Now you know how to use the 80/20 Principle for your business plan to be more successful. You should also think about other parts of your company. An 80/20 analysis is not a magic fix that will automatically make sales go way up. It is even more important to support the right work methods in a company.
From making decisions to managing projects and selling: The 80/20 Principle is so flexible that we can use it to tackle and improve almost any area of a company.
Let’s look at two areas where you can use it.
Negotiations are a key part of business. Often, people prepare hundreds of small points for talks very carefully. But in the end, only about 20% of these points make up 80% of the important arguments. During the negotiation, we don’t need to win on every point. We only need to win on the points that truly matter. So, before the talks, make a long list of demands that are hard to meet. These should be points where the other side will definitely not give in. This way, at the very end of the negotiation, you can present your most important points – your 20% – and succeed with them.
You can also use this principle well in marketing. First, smart marketing is about finding the right customers. So, we must focus on the 20% of customers who bring us 80% of our business. We keep them loyal by giving them excellent customer service. We also create new products with these 20% of customers in mind. Nicholas Barsan, a top US real estate agent, is an example. He earns over a million US dollars in fees each year. More than one-third of this comes from happy past customers. After some time, he contacts them again and asks if they want to sell their property. Also, in marketing, we often ask which products need the most marketing effort. You guessed it: it’s the 20% of products that bring in 80% of the profits.
Blink 5 – Being Simple Leads to More Success Than Being Complex.
Big companies are often very complex. They have countless business areas, and not all of them make good money. This means they need managers who love complexity. These managers enjoy challenges and find intellectual excitement in running complicated companies. But is this truly the way to success?
Hidden in complex companies are often huge costs. Many different products and business areas usually need more office work, harder logistics, longer training for salespeople, and so on. All these things make costs rise sharply. They can even become higher than the profit the products bring in. Less complex companies, on the other hand, have fewer hidden costs. Because of this, they make more money.
The 80/20 Principle advises us to create more simplicity.
We can save costs by removing products and side areas from our range that are not profitable. Such cuts allow all staff to focus fully on the few top-selling products. They don’t have to struggle with the entire product range. This also helps production and logistics. At the same time, it makes less work for the administration team.
Companies that are less complex are also more productive and thus more successful. A study of 39 medium-sized German companies showed something important. The most successful companies were the simplest ones. They had fewer products, fewer customers, and fewer suppliers.
By the way, being simple does not mean a company should stay small. Growth is important because being big allows you to sell more products. This, in turn, helps to spread fixed costs and general costs better. But as a company grows, it should not become more complex. This means not adding countless new products or services.
We see that simpler companies make more profit than very complex ones. If you make your own company simpler, it can cut costs and increase profit.
We have now learned enough about the 80/20 Principle for businesses. Next, we will see how 80/20 Thinking can change and improve other areas of your life.
Blink 6 – 80/20 Thinking Changes Our Personal Lives, Especially Our Relationships.
What did your parents teach you about friendships? Most children are told to value all their friends equally. This seems like a good moral idea. But it also comes from the way people usually think, which is linear. We assume that all causes are equally important and have the same effect on the final result. But this is not true. Linear thinking ignores that not everyone in our lives shapes, supports, or influences us in the same way. Some friendships are simply more important than others. Still, many people have too many friends and acquaintances. Because of this, they don’t give enough attention to the most important people in their lives.
So, our daily life needs a bit of 80/20 Thinking. Most of all, we need it when choosing the people around us. This means our friends, life partners, business partners – simply put: all our allies.
But how do we use 80/20 Thinking with people? After all, you cannot measure the value of relationships with exact numbers.
Let’s start this way: Who are the most important people in your life? Make a list of the 20 people closest to you. Order them by their “importance,” meaning their standing and influence in your life. The first four people on your list usually make up the 20% who bring the most “relationship value.” Then, write down how much time you spend with each person and compare. Most of the time, you will find that we spend much less than 80% of our time with the people who actually make up 80% of our relationship value.
The Village Theory from anthropology says that each person has only a few important bonds in life. For example, two childhood friends, two adult friends, a small number of life partners. The same is true for business connections. Your whole LinkedIn network is not important for your career success. Instead, it’s a few chosen allies or mentors.
If you focus mainly on taking care of and deepening the most important 20% of your relationships, you will enjoy 80% of the value of all your relationships.
Blink 7 – We Don’t Need Time Management, We Need a ‘Time Revolution.’
You hear the term ‘time management’ everywhere. Many self-help books try to help us do more in the time we have. They tell us to fit more tasks into a certain period. This works, but there is a better way. Instead of ‘managing’ time, we should redefine how we use it.
Good time management has been shown to raise productivity by about 15-25%. It is mainly for managers whose schedules are already full. But trying to cram even more tasks into our limited time is not a good solution. We might have more results at the end of the day, but we often struggle with feeling overwhelmed and overworked.
The problem is that most people who use time management methods don’t know which tasks are the most important. They often put 60-70% of their tasks into the highest category. The result is often a carefully planned daily schedule – and, most importantly, longer working hours.
80/20 time management, also called “Time Revolution,” starts with the idea that there is plenty of time. But we only use 20% of our time wisely. For example, in a work project, people often only work well in the last 20% of the time before the deadline. So, cutting the project’s work time in half led to the same result and more productivity.
At the start of a Time Revolution, you realize that hard work does not automatically lead to good results. In fact, many of the most successful managers and businesspeople practice “productive laziness.” For example, Warren Buffett did not become the most successful man of his time by working hard all day. Instead, he made the right investments with little analysis. To follow his example, you should use your energy carefully. It’s better to spend more time thinking now and then, rather than just checking off tasks and making endless phone calls. Of course, you must also shake off the guilt that comes when you replace work with fun and joy. Letting go of being controlled by others is also important here. After all, as an employee, you are expected to work at least 40 hours a week, no matter how you fill those hours.
Finally, you do a time analysis. In this, you find the activities where you use your time well to make a profit. Then, you increase these activities by 20%.
While working as a business consultant, Richard Koch found something. Some of his colleagues were more successful than others, even though they did not work more hours. What made them successful? Consultants usually deal with many customer problems at a basic level. Then, they let the customers act on their advice. But Koch’s colleagues did not follow this usual method. They spent a lot of time thinking about how to solve the most important 20% of customer problems. They did not waste time on office tasks. Because of this, they increased their clients’ profits more than any other consulting firm.
You see: The Time Revolution helps you have more time without reducing your results.
Blink 8 – Happiness and Time Also Have a Connection.
In both work and private life, only a few activities bring us more happiness. Still, we spend time on many unimportant things that have little value for us or for others. Most people judge their life quality by how happy they are. But few try to change their lives to find more happiness. But the 80/20 Principle can help here too.
Most people spend a lot of time on things that make them unhappy. For example, they are not happy with their job. They sit in a stuffy office, doing their duties without much thought, just waiting for the evening or weekend.
But if you look at the balance of happiness and unhappiness in your life, you can make better plans for the future. You can reduce your unhappiness and so increase your overall satisfaction.
Which 20% of your life are responsible for 80% of your happiness?
And what about the other way around? If you squeeze 80% of your happiness into just 20% of your free time, you actually spend 80% of your time on things that make you unhappy. By finding these things and doing them less, you will automatically become happier.
Let’s say your work doesn’t make you feel good. Change something right away! After all, you spend most of your time at work. A new job, part-time work, or similar options could be solutions here. And this is true in a literal sense: When we free ourselves from things that make us unhappy, we gain more time and energy. We can then use this for activities that make us happier. For example, if you reduce your working hours a bit and spend less time at work, you can do things more often with your family or friends.
So, we need to think about the 20% of our activities that bring 80% of our happiness. We should look for ways to spend more time on them. This way, nothing will stop you from great happiness.
Summary
If we act according to the 80/20 Principle, it brings us many benefits. By using it, we can increase our company’s profit. We can also be much more productive at work through revolutionary time management. And, very importantly, we can increase our personal happiness in our private lives. Changing our thinking to 80/20 will change our lives.
Source: https://www.blinkist.com/https://www.blinkist.com/de/books/das-80-slash-20-prinzip-de