The 80/20 Principle

Text translation (literal) of the video:

Hello and welcome to this new video from the “Books for a Change of Life” blog.

I have already written three articles on books related to financial independence. But today, I have decided to change tack a little bit as I will give my views on a book that not only covers financial independence, but also a lot of other areas. It’s really a book that references many aspects of life, the book is “The 80/20 Principle“. I was slightly surprised myself that I hadn’t already reviewed it on my blog, as it’s a book which is really important to read. It sits alongside this book very well, “The 4-Hour Work Week“.

By the way, if you haven’t yet read “The 4-Hour Work Week”, you definitely should. It is imperative that you read it. These days, if you want to be an entrepreneur or have an inkling to start a business, you may not agree with everything in “The 4-Hour Work Week”, but you have to read it. But anyway, let’s get back to the point.

“The 80/20 Principle” is a book that really examines the details of this principle.

What is the 80/20 principle?

It is a principle that is very simple in its concept. It was discovered by an Italian economist named Alfred Pareto. He discovered a law that was named after him, Pareto’s law, after his studies that related to the distribution of wealth throughout the world. He realized that 20% of the countries held 80% of the world’s wealth. It was at the turn of the 20th century that he carried out his study. When he analyzed the wealth distribution within these rich countries, he realized that 20% of the population owned 80% of the wealth of the countries. This was something that he recognized to be universal. He studied it over an extended timeframe. He went through archives in various countries and he always, without fail, came across the same ratio.

Be careful, obviously it’s not always exactly 80/20, but it’s pretty much always around those levels.

Several decades later, some researchers took this figure as a basis to ask whether it could be applied to other things as well. They discovered that in business, it’s generally 20% of customers who generate 80% of the turnover. In factories, 80% of the problems are generated by only 20% of things and so on.

Their realization was that it was something that could be universally applied to a lot of areas. And so, in this book “The 80/20 Principle”, the author Richard Koch explains precisely how it’s universal and how we can best use it in all kinds of fields, be it work or personal.

By the end, you are made aware of how prevalent this principle is throughout the world.

Indeed, the first time I discovered the 80/20 Principle was when I read “The 4-Hour Work Week”. I conducted some analysis of my own company to get an idea of the distribution of turnover. And I was shocked to see that 17% of the customers generated 81% of my sales. So, as you can see, we were really very close to that percentage split. Naturally, I already knew that some of my clients spent more money than others, but I would never even have imagined that it was so close to this figure.

That motivated me to read this book.

Therefore, we are able to understand that in companies, 20% of clients bring in 80% of the revenue; that 20% of the decisions taken lead to 80% of what we achieve; that 20% of our friends provide us with 80% of our happiness, 20% of our friends cause 80% of our misery; 20% of customers provide us with 80% of our happiness; 20% of customers cause us 80% of our misery, and so on. It’s clearly something that can be applied in virtually every area of life.

Richard Koch focuses on the main areas that relate to both our personal and professional lives, explains how the 80/20 principle applies and gives us some ideas on how to improve our mental focus. Obviously, it is this famous 20% that is the secret needed to achieve 80% of positive results. So, my point is that when I first made myself aware of this, with my first company, I noticed that it was not just simply that 17% of my clients brought in 80% of sales, but also that it was about 20% of clients who caused 80% of the problems and 20% of them who were responsible for 80% of my joy and satisfaction, because I loved to see and meet up with them.

What did I do?

I immediately upped my fees to make sure that all the customers who didn’t bring in enough profit left and used anther company’s services. Next, I parted ways with the 20% of customers who caused me problems. And overnight, I found myself with a company that was much nicer to run, more profitable, a lot more fun, and required a lot less of my time. If you read this book and practice what it proposes, these are some of the things you can achieve.

So, I highly recommend that you read “The 80/20 Principle” by Richard Koch. Try it, apply it and let me know how it works out for you.

Thanks to all of you who have watched this video and see you soon for more adventures.