The 80/20 Principle
Richard Koch, 1997
Four films out of three hundred took 80% of all the ticket money. Richard Koch, a business strategy consultant, shows that this kind of imbalance turns up almost everywhere: in a company's profits, in the work week, in friendship and even in happiness. You'll learn how to find the few things that bring the main result, and how to stop spending energy on the rest.
Who it is for
For people who work hard and still feel the results are modest. And for anyone who wants to understand where their time, money and energy really go.
A shortage of time is nonsense. In truth, we have an ocean of time.
Advice to skip lectures
When Richard Koch was a student at Oxford, his tutor gave him some strange advice: never go to lectures. You can read a book much faster than you can listen to lectures, he explained. But you don't need to read a book from cover to cover either. First read the conclusion, then the introduction, then the conclusion again, and after that only the parts that grab you. Later Koch understood the point of this advice: almost everything important in a book fits on a small share of its pages.
He went further. At Oxford, your grade came from the final exams, so Koch went through the papers from past years. It turned out that 80% of the questions, and sometimes all of them, could be answered if you knew a fifth of the topics well. The examiners especially valued a student who knew a few things in depth. Koch graduated with top marks and, in his own words, without much strain.
Then he became a business strategy consultant and saw the same thing everywhere. A few clients bring in almost all the profit. A few key questions decide almost all of a project's success. That is how the 80/20 Principle works, and in 1997 Koch devoted a whole book to it, exactly a hundred years after the Italian economist Vilfredo Pareto noticed the imbalance.
Ahead is the story of four films that took most of the ticket money, and of a part that cost a factory five thousand times more than a simple one. You'll also see why we have more time than it seems. Let's start with where this imbalance comes from.
Four films out of three hundred
In 1897 Pareto studied how income and wealth were shared out in 19th-century England. That most of the money belonged to a minority did not surprise him. Something else did. The share of people and the share of their wealth matched up by the same rule every time. This rule repeated itself in different years and in different countries with almost mathematical precision. Pareto never managed to explain it.
Shortly before Koch's book came out, two economists studied 300 films released over a year and a half. Four films, just 1.3% of the total, took 80% of all the ticket money. The other 296 split the remaining 20% between them. Koch explains it like this. The first viewers and critics talk about a film with people they know. Their opinion decides whether a second wave of viewers goes to the cinema, and the third wave depends on the second.
The same thing happens with two baby fish in a pond. The one that's a little bigger swims faster and opens its mouth wider, so it gets much more food. Every day the gap between them grows. This is what the author calls a feedback loop: a small advantage strengthens itself.
This leads to the book's main idea. We expect balance. We assume that all clients are equally valuable, all days of the week equally important, all friends worth about the same. Koch calls this the 50/50 fallacy. In reality, a small share of causes almost always brings a large share of the result.
The numbers here are only a guide. The imbalance can be 70 to 30 or 99 to 1, and the two numbers don't have to add up to a hundred. What matters is something else: you need to compare two different sets. One is people or things, the other is what they produce. If 80% of people are right-handed, that tells you nothing about an imbalance between causes and results: there is only one set here.
Koch suggests two ways to look for the imbalance. 80/20 Analysis needs numbers: for example, you line up your clients from the most profitable to the least and see what share of them brings most of the profit. 80/20 Thinking does without spreadsheets. It's the habit of asking yourself again and again which 20% lead to 80% of the result. The author warns: never assume you know the answer in advance.
About the author
Richard Koch is a British business strategy consultant and investor. He worked at Shell and Mars, became a partner at a consulting firm, and then started his own firm with two colleagues.
All books by this author: Richard Koch
Terms from the book
- Pareto
- feedback loop
- Shell
- consulting
- 80/20 Principle: The observation that a small share of causes usually brings most of the result. The numbers 80 and 20 are a rough guide here, not an exact law.
- 80/20 Analysis: The author's term: a way to find the imbalance using numbers. You line up the causes from the one that gives the most to the one that gives the least, and see what share of them brings most of the result.
- 80/20 Thinking: The author's term: the same search for the few things that matter most, but without counting. You ask yourself which 20% lead to 80% of the result.
- Corning: An American company that in the 1990s made ceramic parts for car catalytic converters. Koch looks at its case in the book.
- catalytic converter: A device in a car's exhaust system that makes the exhaust gases less harmful.
- happiness islands: An image from the book: short periods of life that brought a disproportionate amount of joy.
All terms
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