The Pareto Principle – What (or Who) is Worth the Effort?

As promised, this week’s is just a short one. It’s also more conceptual and less scientific, so a little lighter on experimental research (maybe I’m taking something from this post) – it’s a look at the Pareto Principle and how we can use it to be more efficient.

Vilfredo ParetoThe Pareto principle is named after Vilfredo Pareto, an economist who showed that 80% of the land in Italy was owned by 20% of the population. It turned out that this wasn’t the only thing that followed the 80:20 pattern; a wide range of phenomena showed that around 80% of the effects were related to approximately 20% of the causes (including, so the story goes, that 80% of peas came from 20% of pods).

Given how widespread this distribution seemed to be, Joseph Juran, a management consultant, proposed that this was a generalizable concept. He saw a huge number of possible applications for the principle – and it’s come to be known by a number of names, including the 80-20 rule, the law of the critical few and the principle of factor sparsity (because there are a limited number of factors that have a substantial effect on the outcome).

In reality, it’s unlikely that the ratio will be exactly 80-20. For example, the UNU-WIDER 2008 report on global inequality showed that (based on 2000 data), globally, the wealthiest 10% owned 85.2% of the wealth. The general principle, however, holds – the critical few things, people, events etc. can deliver the majority of your results, cost you the majority of your time and/or determine your success.

Wealth in the US
Wealth distribution in the US – the reality, what Americans think it is and what they’d like

In the 4-hour Workweek, one of the big steps Timothy Ferriss took to reduce his working week was follow the Pareto principle. His sport nutrition firm, BrainQUICKEN, regularly served about 120 customers and Ferriss was working 14 hours a day, 7 days a week.

He had enough, so decided to analyse what he was getting from his customers. He found 5 of those customers accounted for 95% of the firm’s revenues, so he honed in on that part of his business – quartering his hours while doubling his revenues.

But he didn’t save all that time just be focusing on the “good” customers; he also identified and then stopped serving the “bad” customers. They delivered very little revenue, but took up a lot of time in unnecessary (from Ferriss’ perspective) contact and required lots of “urgent” attention.

brainquickenTo me, that was where Ferriss stepped off the well-trodden path. Most small or growing businesses become so desperate for customers that they’ll take on any client. They think that it’s a failure to be unable to deliver what every customer wants, but, as BrainQUICKEN showed, there are some customers it’s just not worth having.

The Pareto principle is often spoken about, as I’ve done above, in relation to businesses (partly because there’s more funding for research on this and partly because there are genuinely loads of applications, e.g. it’s also relevant to a workforce – your top 20% need to be looked after and your low delivery, resource intensive 20% moved on) and external/global factors (like distribution of wealth). I think it’s even more important to us as individuals – and not just in relation to work.

We spend huge amounts of time on tasks that don’t add much value to us (where I’m defining value as anything that we desire – happiness, wealth, power, love etc). We do this in a couple of ways: 1) we do things that deliver very little benefit; and 2) we speQuote on Prioritisationnd too much time/effort/money on doing things that are worthwhile, but the marginal gain of spending that extra resource is negligible. I can’t cover all the reasons people do that here, given there are hundreds of textbooks on that, but it’s fair to say we’d be better off if we did less of it.

By looking at the things we do through the lens of the value those actions deliver, we can start to work out which actions deliver our 80% of positive outcomes and which actions take up our 80% of effort. This allows us to become more and more efficient – whatever you want to achieve.

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