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I first learned about the Pareto principle in 2011 through Chris’ $100 Startup book. In a last book I read, Personal MBA by Josh Kaufman, I was bombarded with the concept again. And it made light of a story I had once heard….
What is it all about?
Any company is made up of people and systems. And in a complex system a small amount of inputs generate most of the outputs. This non-linear pattern is called the Pareto Principle, or by many, the 80/20 rule.
Please note: This principle is not only adapted to business.
(a) we usually use less than 20% of the clothes we have in our closet, over 80% of the time.
b) usually less than 20% of the clients are responsible for more than 80% of the revenues
c) we usually communicate more than 80% of our time with less than 20% of our acquaintances
What does this principle mean to us? That we must focus on the optimal inputs to generate the most results/outputs we want.
I once heard a story about a construction materials company, which reduced half of its fixed costs while maintaining its turnover level and increasing its profit, without laying off anyone. Yes, of building materials… At the time I did not realize if there was some concept and principle associated… This is how Aha Moments are made!
Of the 45 customers of this company, 12 accounted for more than 90% of the company’s turnover. By focusing on these 12, management succeeded and discovered that they could easily reduce the company’s fixed costs by more than 50% and make even more profit. What is more… perhaps even more important, most of the problems, annoyances and headaches were coming from 4 customers, who were part of the 33 customers that the management had “fired” and who represented 10% of the company’s turnover. Yes, the management of that company didn’t fire employees, they fired customers…
Sometimes you have to stop and look from the outside to realize that the solution to many of your problems is right in front of you…
You might also like to read: The Back to Work Post-Vacation Syndrome