A good friend and I were chatting about Pareto and 80/20 rule. It reminded me how important these two concepts are to our lives. Then 2 days later, I listened to a manager spout about the 80/20 rule and realized that the moron should rename his drivel the “80/20 bullshit rule” because he had no clue what it meant. Here’s the summary he missed while he was out getting his management lobotomy
- We often assume that income, sales, and results are gently distributed on a curve (normal distribution). But, usually there is no bell curve, as roughly the top 20% of generate 80% of the results, hold 80% of the income, and that small # of customers generates the majority of revenue in most cases. Focus on the high return areas. Accept that you can often cut time from the lower return areas once you identify them. And note also that these lower returning areas are often very time-consuming.
- These same results occur in various areas of life (sales, income, customer service, etc). These are called Power Curves, because by changing something in the high end, you can significantly magnify the effect on results.
80/20 rule is often confused with some vague notion of “focus on what most people mostly need” or “do most of the work, but no need to finish.” That is complete bullshit.
The moron’s 80/20 rule will celebrate the 80% complete bridge…the one with the gaping hole in the middle of the bridge over the water. Every time someone is asking you to cut down what you should do, make sure that the remaining items are enough to get across the water safely, or produce a sale, or allow someone to fully accomplish their goal.
The Pareto rule or 80/20 rule is about focusing on the few scenarios which are important, and do a killer job for those few users, scenarios, etc. For the few who matter in software, sales, or other areas just prepare to see that a few (20%) will generate most of the good or bad…and react accordingly. Focus on the small # who generate the most revenue, and fire the few bad customers who generate most of the grief. If we bring back our bridge analogy, this is the minimalist bridge, which crosses the water completely, but lacks several of the frills, bells, and whistles which were probably in the discussion. This bridge gets us all the way across the water, without much else. It is our Minimum Viable Product if you come from “Lean Startup” vocabulary.
Examples of Pareto’s 80/20 rule commonly shown in business schools:
- 80% of your profits come from 20% of your customers
- 80% of your complaints come from 20% of your customers
- 80% of your profits come from 20% of the time you spend
- 80% of your sales come from 20% of your products
- 80% of your sales are made by 20% of your sales staff
- 20% of the hazards will account for 80% of the injuries
Both Seth Godin and Tim Ferriss recommend firing your worst customers, to enable focus on the most profittable or better customers. I will say that firing my own worst customer felt better than anything I could have imagined. I’d recommend trying it.