Using the “80 to 20” Principle in Business
Almost everyone in his personal life and business spends time, energy and money on things that are indirectly related to our happiness and values for others. Learn to attach importance to those few people and events that give meaning to life and provide maximum income.
What do language, cinema and the Internet have in common? Perhaps a lot, but one key similarity is that all of these are pronounced examples of the exceptionally useful law of force, which always indicates where more can be obtained for less.
In 2004, two Xerox researchers found that most of the traffic on the World Wide Web was controlled by a small percentage of sites: 119 sites — less than one-tenth of 1 percent — accounted for 32 percent of all visits. 5 percent of the sites selected for the study 6000 accounted for 75 percent of visits.
The same model – a handful of omnipotent winners and a mass of insignificant losers – is present in the film industry. In 2003, two economists studied the profitability and life expectancy of 300 films that were released over a period of 18 months. They found that four films earned 80 percent of the box office, while 296 films had to share a tiny fraction of 20 percent. In other words, 1.3 percent of the total number of films provided 80 percent of the revenue – an example even more extreme than the World Wide Web, but the degree of uneven distribution is about the same.
The third example is our everyday language. Sir Isaac Pitman invented shorthand after discovering that 700 words made up a staggering 70 percent of the spoken language. When including derivatives of these words, the proportion reached 80 percent. At the same time, the classic New Oxford Shorter English Dictionary includes half a million words. This means that 80 percent of the communication is provided by less than one percent of the total number of words. Almost the same as in the movie.
The similarity of the Internet, cinema and our speech lies in the extreme unevenness of the division of production. The first person to pay attention to the prevalence of such models was the Italian economist Vilfredo Pareto, who in 1897 studied the distribution of wealth and income between the working population. Pareto found that a small minority received the bulk of the total income (or possessed a predominant share of wealth). But most of all he was interested in the fact that the proportion of distribution remained almost the same in all periods of time and in all countries that he considered. Over the past half century, the Pareto law has become widely known under the name of the 80/20 Principle (or the 80/20 rule), as practice shows that in any form of distribution, approximately 80 percent of the participants usually account for 20 percent of the participants.
Numerous business studies show that 20 percent of the most popular types of products account for approximately 80 percent of total sales, and that the same 20 percent of consumers purchase 80 percent of the products, and that approximately 20 percent of sales generate 80 percent of revenue. Moreover, I bet that 80 percent of crimes are committed by 20 percent of criminals, that 80 percent of accidents are caused by 20 percent of drivers, that 80 percent of scuffs on your carpets occupy only 20 percent of their area, and that 80 percent of your time wardrobe.
“80/20” is not a magic formula. The actual ratio is very rarely exactly 80/20. Sometimes the correlation between results and causes is closer to 70/30 than to 80/20. Sometimes, as in the three examples above, the ratio even exceeds 80/20. For the Internet, it is 75/5: 5 percent of sites attract 75 percent of visitors, and 7 percent account for 80 percent, so in this case we should talk about 80/7 rather than 80/20. In the cinema, we are talking about 80/1 (if rounded to the nearest whole number): 1 percent of films gives 80 percent of the gross box office. Using words also shows an 80/1 ratio: less than 1 percent of words use 80 percent of the time. Although the point is not what exactly we will receive in each specific case: 80/1, 80/7, 80/20 or 80/30.
The fact is that the relationship between causes and effects is very rarely 50/50 or so. In this sense, the universe is not very democratic. The same thing happens with the Internet, despite hopes that it will allow a wide range of rivals to compete on a level playing field. The phenomenon of “lambs and goats” is almost always present: some parts of the picture are of great importance, and most of the rest is in the minor background. The strength of the 80/20 principle is that it is not completely intuitive. Although we expect that some things will be more important than others, we do not expect that the difference between important and not very important things will be as great as it usually happens.