One fascinating theory entrepreneurs can easily apply to their companies is the 80/20 principle. It was initially an observation made by Vilfredo Pareto and has been lately popularised by Richard Koch in his book "The 80/20 principle". This principle states that 20% of the inputs create 80% of the outcomes. In other words, a small number of causes produce disproportionate consequences.
In his book, Koch gives many real-life examples of this principle in action: 80% of the world's CO2 pollution comes from 20% of the sources, 80% of website traffic comes from 20% of the content, 80% of crimes are committed by 20% of the criminals, etc. However, those data must be taken with a pinch of salt; all those examples are observations of specific cases; it is not a great law of the universe stating that everything has a perfect 80/20 correlation.
What is true is that we can often find a minority of causes that create a disproportionate amount of the results. In the United States, 10% of the population own 70% of the country’s wealth; 2% of the search engines are responsible for 96% of the searches online; and less than 10% of drinkers account for 50% of alcohol consumption.
As an entrepreneur, you can use this theory to your benefit. You can improve your time management and focus on the 20% effort that creates 80% of the results, optimize your benefits by focusing on the 20% of customers that account for 80% of your total margin, and find alternatives to what accounts for 80% of your costs. Keep in mind that the idea is not to have an exact 80/20 ratio but to focus on the inputs with disproportionate results.
This principle is used not only by companies to increase their profits, but also by non-profit organizations to provide solutions to our planet’s biggest problems. For example, the Ocean Cleanup organization found that just one thousand rivers are responsible for roughly 80% of riverine plastic pollution. Instead of trying to clean up all the oceans and rivers in the world, their goal is to focus on the leading causes and answer this problem. They have created the interceptor, a 100% solar-powered barge that acts as a filter so that plastics and other rubbish are trapped and don’t flow into the ocean. With this solution, Ocean Cleanup want to have interceptors in each of those thousand rivers by 2025 and hope to catch 80% of the world’s water-based plastic pollution before it gets into the ocean. This is an excellent example of applying the 20/80 principle, focusing on the leading causes to create great results.
Sources:
The 80/20 Principle by Richard Koch
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