Why do some people and organizations enjoy massive success and wealth while the rest of us don’t? In The 80/20 Principle, management consultant and entrepreneur Richard Koch explains that the successful few are simply leveraging a fundamental truth at work in all of our lives: 80% of results stem from 20% of inputs.
Although our lives tend to be increasingly busy and complex, only a small fraction of the actions we take—and the people we interact with—contribute to our joy and success. According to Koch, we can all take advantage of this 80/20 Principle to multiply our happiness and success by focusing our time and energy on the few things in our lives that really matter.
In this guide, we’ll cover four main topics:
Throughout the guide, we’ll explore the scientific research behind key principles, such as how to revolutionize your view of time and the link between happiness and productivity. We’ll also introduce practical steps you can take to boost your efficiency and happiness that complement Koch’s tips. Furthermore, we’ll explore alternative viewpoints that challenge some of Koch’s assertions and share how technological advances are expanding possibilities for applying the 80/20 Principle.
According to Koch, the 80/20 Principle is at work in every aspect of our lives, and we can use this principle to simplify and optimize our lives. Let’s examine what the 80/20 Principle is and why it matters.
The 80/20 Principle dictates that 80% of outputs stem from 20% of inputs. This unbalanced relationship, Koch says, shows up in various areas of life. For example, in any given company, we can reliably predict that 20% of products account for 80% of profits, 20% of customers account for 80% of sales revenue, and 20% of employees account for 80% of results. Similarly, in our personal lives, we owe roughly 80% of our achievements to 20% of the time we invest, 80% of our happiness to 20% of our life experiences, and 80% of the value we derive from relationships to 20% of the people in our lives.
(Shortform note: Koch credits discovery of the 80/20 relationship between inputs and outputs to Italian economist Vilfredo Pareto. According to Koch, Pareto studied wealth concentration among people in 19th-century England and discovered that a minority of people held the majority of wealth. Many people have commented on Pareto’s discovery using many different terms. For example, in Eat That Frog!, Brian Tracy refers to the “80/20 rule.” Similar to Koch, Tracy says we should complete the most important task (the biggest frog) first. Also, in The One Thing, Gary Keller refers to the “Pareto Principle'' and gives similar advice: Focus on the few, highest-impact efforts to create extraordinary results.)
Koch assures us that we can apply the 80/20 principle to clear out the waste in our lives and devote our energy to the people and activities that bring us joy and success.
According to Koch, most of us waste tremendous energy and effort in our work lives on things that don’t ultimately matter. We respond to every email request, accept every meeting invitation, and devote our precious time to people who don’t advance our career development. As a result, Koch says, trivial concerns dominate our days, which leads to widespread inefficiency, dissatisfaction, and missed opportunities. Instead, Koch says we should focus on the 20% of tasks responsible for 80% of our productivity.
We also waste energy and effort in our personal lives, according to Koch. We fill our days with errands and unfulfilling distractions like social media, and we spend too much time with people we don’t like or who drain our energy. As a result, Koch says, we have an underlying sense of unhappiness. Instead, Koch says we should focus on the 20% of life activities that are responsible for 80% of our happiness.
(Shortform note: Koch rightly points out that many people spend inordinate amounts of time on activities that arguably produce low returns. For example, data shows that people spend an average of 147 minutes per day on social media and about three hours per day watching TV. Also, employees spend 28% of work time on email. Reallocating these blocks of time, as Koch suggests, may indeed result in more happiness and productivity. However, there’s no guarantee. One study on social media usage revealed no significant change in a person’s mood after they quit social media for one to four weeks.)
However, Koch asserts that when people do focus their efforts on the things that matter, they prosper. People are happier and more productive doing things they actually enjoy. Companies are more streamlined and profitable and are able to deliver greater value to customers.
(Shortform note: Is Koch right to link happiness and productivity? Research says yes. According to an extensive study on happiness and productivity, workers are 13% more productive when happy. Happy workers don’t work more hours—they are simply more productive than their unhappy colleagues during their time at work.)
Possible Corrosive Effects of the 80/20 Principle in Businesses
Although Koch touts the benefits of applying the 80/20 Principle, he doesn’t address potential negative consequences that could stem from its application, which others have highlighted.
In a business setting, the 80/20 Principle could be used to justify giving the highest and most frequent bonuses to the top 20% of performers—and that could backfire. Employees will see each other as competitors for scarce rewards, making them less inclined to work together. Also, it could make the 80% of lower performers feel like they don’t matter, thereby demotivating them to contribute even at their current level, much less improve. Research by Gallup found that disengaged employees have 18% lower productivity, 37% higher absentee rates, and 15% lower profitability. So, focusing only on the top 20% could result in a self-fulfilling prophecy that actually creates an even wider gap, pushing 80/20 more towards 90/10 or 95/1.
As a result, businesses can miss out on valuable talent and innovative ideas that could help drive the company forward. Indeed, research shows that companies that rely on input from just a small percentage of their employees innovate less and encounter more barriers around problem-solving and communicating with customers from specific markets.
In contrast, companies that intentionally gather input from diverse people across their workforce innovate more and benefit from wide-ranging perspectives. For example, people who represent different races, genders, cultural backgrounds, and sexual orientations can share how likely they are to respond to a particular marketing message, which allows company leaders to see the probable impact of critical decisions from multiple angles.
Thus, critics of 80/20 say the focus of business leaders should be finding ways to get people at all levels of a company to contribute ideas—and getting top performers to bring the other 80% up to their level, contrary to Koch’s advice.
How do we know the 80/20 Principle is real? What factors explain it? Koch says the causes are difficult to isolate because there are many interdependencies. For example, two employees may have the exact same training but differ greatly in their contributions to a company. Is the performance gap due to different working conditions, levels of motivation, mental distress, support from colleagues, or something else entirely? Koch says it’s impossible to know, and ultimately it doesn’t matter.
We can verify the reality of the 80/20 Principle by observing its effects, and Koch encourages us to test his assertions against our experience. What we will find—reliably and consistently—is that some inputs have a huge influence whereas others are relatively insignificant. This unbalanced relationship will persist, Koch says, unless we make a determined effort to change it.
Improved Analytics Make It Possible to Diagnose and Predict Outcomes
Although Koch says it’s impossible to precisely pinpoint the causes behind any given 80/20 relationship, that may be changing. Advances in machine learning and analytics are enabling organizations to extract more valuable insights from greater volumes and variety of data.
For example, digitization of business processes and customer experiences allows companies to answer very targeted questions: What 20% of customer experience elicits 80% of satisfaction? What 20% of company communication creates 80% of its impact among employees? Also, finer-grained analytics on product features—not just products themselves—are guiding companies to execute data-driven redesigns. By removing undesirable or little-used features and enhancing desirable features, companies are able to reduce costs and increase value delivered to customers.
Additionally, rather than looking at each variable in isolation, advanced analytics make it possible to discern how separate forces within a company intersect and overlap in ways that either build or diminish returns. Given that hundreds, even thousands, of variables can affect any outcome, cross-sectional analyses like this are essential to unravel complicated interactions. Companies can then use data to combine the best attributes from multiple areas, amplifying performance in novel ways.
Thus, these advances are opening pathways for companies to use data to not just specify causes of particular outcomes but to predict and prescribe the most promising actions for the future. As analytics continue to become more sophisticated, businesses will likely find more ways to supercharge the effects of the 80/20 Principle that Koch describes.
Now that you know what the 80/20 Principle is and why it matters, let’s examine the mindset shifts you must make to take advantage of the 80/20 Principle and achieve the happiness and success you want. Koch identifies three core beliefs you must embrace: Major improvements are always possible, it’s your duty to enjoy life, and time is abundant.
First, Koch says, we need to assume that the way we currently do things is compromising our happiness and success. We must abandon the notion that we’ve already done all we possibly can to improve our lives, as this mindset will prevent us from realizing our potential.
Instead, we must internalize the belief that we can greatly improve the quality of our lives by applying the 80/20 Principle. The reality, Koch says, is that we can always make major improvements to increase our wealth, happiness, freedom, and knowledge—either by doing things differently or doing less. Once we embrace this insight, we can take action to expand the 20% of our lives that help us make those improvements.
The Downside of Pursuing Relentless Improvement and Chasing Happiness
Whereas Koch says we should acknowledge the ways our lives fall short of what we could have and focus on getting more of what makes us happy, others say that approach actually leads to more unhappiness and suffering. Why? The notion that we can control our lives to always have what we want causes us to feel like we are a failure for not being happy and having the life we’re “supposed” to have. Further, it makes us feel deprived of the “good life” that everyone else gets to have. When we think there is always something better, we will never be satisfied with what we have in the present moment.
So, instead of focusing on what we don’t have, we need to learn how to be OK with our lives as they are—through inevitable ups and downs and contradictory feelings. Rather than yearning for an imaginary better place to get to, we should stop chasing happiness. This will allow us to enjoy our life right now and be free—not from the experiences we don’t want but within the experiences we don’t want.
This alternative approach does not necessarily preclude seeking ways to improve our life, as Koch says we must do, but it could enable us to be more present and grateful as we pursue growth and change.
Second, Koch says we need to stop feeling guilty for working less and doing things we enjoy. We must abandon the notion that seeking pleasure equates to selfishness, laziness, or apathy. This mindset leaves us unfulfilled, resentful, and tethered to tasks and people that undercut our joy.
(Shortform note: Research shows that our brains are hardwired to seek pleasure, so Koch’s advice to give up guilt around doing things we enjoy syncs up with our evolutionary design. Humans have an inherent drive to seek pleasure, which is what drove our ancestors to find food, shelter, and mating opportunities. So, enjoying ourselves is natural—and actually helps us stay healthy by reducing stress.)
Instead, we must embrace the belief that it’s our duty to seek pleasure and enjoy life. Why? According to Koch, we have a duty to achieve greatness, and we’re much more likely to achieve greatness when we enjoy pursuing it. However, Koch does not endorse a life of total relaxation and luxury. He says pleasure-seeking must go hand-in-hand with extreme ambition—“ambition” in the sense of wanting to contribute value and change things for the better.
Koch says we need to apply the 80/20 Principle to focus on the 20% of activities that bring us pleasure. Filling our lives with enjoyable activities will help us cultivate the mindset necessary to achieve greatness. We’ll be happier doing things we actually enjoy and thus become more productive, which will enable us to prosper.
(Shortform note: Research supports Koch’s assertion: A study on over one million people found that happier people earn more rewards, have better relationships with peers, and are more likely to become leaders. Furthermore, they tend to be healthier, more creative, and more motivated to succeed. These results held even after accounting for a range of variables, including status, gender, race, and education.)
Third, Koch says that we need to give up the belief that there is a shortage of time. When we regard time as a scarce resource, the only option we can see for doing more of what we love is to squeeze pleasurable activities into the gaps of our lives. We feel compelled to do more because we think that doing more with a seemingly small amount of time is the only way to experience more of what we want. We can’t see any way to eliminate anything without compromising our livelihoods.
Instead, Koch says we need to embrace a completely new view of time. In reality, he says, time is abundant, and this perspective will revolutionize our lives: According to the 80/20 Principle, we’re most productive during a mere 20% of the time we spend working. If we simply focus our time on the 20% of tasks that deliver the highest return, that leaves 80% of our time open, and we can choose whether to spend this time on pleasurable pursuits or more high-return, productive work. From this perspective, time isn’t scarce—80% is plenty of time for the activities, both professional and personal, that give life meaning.
Why We Feel Like We Don’t Have Enough Time, and How to Overcome That Feeling
Why do we always feel short of time? Koch doesn’t say, but researchers have identified scientific reasons why we feel there isn’t enough time, and those reasons point toward adjustments we can make to feel less limited by time constraints:
You don’t get enough sleep. Insufficient sleep lowers our productivity, and when we perform slower than we otherwise would, we feel like lack of time is the problem. To change this, aim to get seven to nine hours of sleep per night, which researchers say is the ideal range for adults.
You don’t wake up early. Morning people tend to get more done and be more productive in a typical nine-to-five workday. Start waking up a little earlier each day so you don’t feel like you’re playing catch-up.
You focus too much on what you don’t have or what you haven’t completed. If you’re pessimistic—always thinking, “I have too much to do”—you’ll add to a negative feedback loop that intensifies your feelings of scarcity. Try to focus on more positive aspects of your day and things you have accomplished.
You multitask. When you try to do more than one task at a time, you lower your productivity at each individual task and increase the time it takes you to finish those tasks. This causes you to feel like you don’t have enough time. Instead, devote your attention to one task before moving on to another.
These adjustments will help you think about and experience time as abundant, which Koch says is essential.
Now that you know the three core beliefs you must internalize to improve the quality of your life, let’s explore how you can apply the 80/20 Principle in your personal life to increase the success and joy you experience inside and outside your work. We’ve consolidated Koch’s advice into five tips.
According to Koch, the key to success and happiness is not hard work. The future, he says, rewards creative innovators who are savvy enough to manipulate the 80/20 Principle for their advantage, allowing them to work less and earn more.
According to Koch, we can observe this among the successful few, who work less by finding unconventional ways to use time. They turn down superfluous meeting requests, outsource the tasks they aren’t good at, and focus exclusively on the things they know lead to high returns on happiness, profits, or both. For example, it may take someone four hours to create an intricate spreadsheet whereas it would take the accountant on staff 30 minutes. In this case, it’s much more time efficient to assign the spreadsheet task to the accountant. Koch insists we need to do similar time reallocation to work less and be more productive.
If you think this is unrealistic, remember: Koch says you must ditch your skepticism because you have more control over your life than you think. He asserts that most of what we’ve been taught to believe about advancing in our lives and careers is wrong. If we compromise and conform to expectations of working long hours, we’ll sacrifice our happiness and freedom and undermine our earning potential. So, Koch tells us to define our own “rules” by applying the 80/20 Principle.
Does Working Less Really Lead to Success, and Is It Even Possible?
Although Koch says that working less is key to multiplying our happiness and success—and that everyone can control how they allocate their time, to greater or lesser degrees—others challenge this assertion.
Researchers point out that many people do not have as much control over their life circumstances as Koch seems to imply. For example, people in poverty often have such an intense focus on stretching their scarce resources that it absorbs all their mental capacity. Thus, they have negligible “cognitive bandwidth” to pursue job training, education, leisure, or other activities that could help alleviate their suffering and lead them out of poverty. Further, people who deal with stressors such as discrimination, limited access to health care, and exposure to crime are highly susceptible to physical and mental disorders that limit their opportunities.
What about people at the opposite end of the earnings spectrum? Are they as free from hard work as Koch states? Many self-made millionaires say absolutely not. In fact, they attribute their success to working long, hard hours. For example, entrepreneur and Shark Tank star Daymond John says the secret to success comes down to one thing: work. He says that to succeed, people need to be all-in by allocating most of their time to their career ambitions. Ultimately, then, Koch’s prescription to work less is not necessarily a surefire path to success and might not be open to all.
Aside from using time in creative ways, Koch says the key to happiness and success is to choose work you love and can do better than the vast majority of other people. According to Koch, it’s fruitless to spend time doing things you’re not great at—or trying to shore up your weaknesses—because doing so will erode your sense of self-worth and diminish productivity. Instead, you should focus on amplifying your strengths—your top 20% of skills that earn 80% of your success—to multiply your satisfaction and results.
When we excel at something, Koch says, we’re more likely to enjoy it, so these two qualifiers go hand-in-hand. And remember, according to Koch, enjoying your work helps you be more productive.
Is It Better to Ignore Weaknesses or Build on Them?
Whereas Koch advises us to ignore our weaknesses, others say we should build on them. One study found that 60% of leaders in a company made “significant positive change” when they worked to change their weaknesses. By focusing on your weaknesses, you can eliminate obstacles to personal and professional growth. For example, if you’re bad at public speaking and you want to take on a leadership role that requires facilitating meetings, you’d benefit from getting some training in this area. To start strengthening your weaknesses, take these steps:
Identify what you want to improve. Be honest without being self-critical. Remember, you’re doing this to benefit your life and career, not punish yourself.
Visualize success. Take time to consider the benefits of changing and the freedom it will provide you.
Set clear goals. Be sure you have a way to assess your progress so you can make adjustments as needed and celebrate successes along the way.
Get support from someone you trust. Reach out to a colleague, mentor, or professional coach who can help you improve.
If you embrace the process of building on your weaknesses as a challenge, it might make you feel more confident, contrary to what Koch says.
No matter how independent and skilled you are, Koch says you will not achieve success on your own. You need allies. But don’t waste your time on low-quality relationships. Instead, choose your personal relationships and professional allies with extreme care. Only invest your time and energy in people who help you the most and make you happy.
In your personal life, Koch recommends that you only devote time to people who help you and bring you joy. Reduce—or ideally eliminate—the time you spend with people who take more than they give. For example, if you routinely spend time with a friend who complains about everything and never offers anything positive or motivating, it’s in your interest to end that relationship.
(Shortform note: Research supports Koch’s claim that spending time with people who make us happy improves the quality of our lives. Studies show that spending time with family and friends helps us cope with stress and boosts our happiness, even more so than increased income. Further, spending time with supportive family and friends gives us a stronger sense of purpose in life and can even benefit our physical health by lowering our blood pressure and pulse, thereby reducing our risk for cardiovascular disease.)
Koch provides guidelines for how to choose professional allies who can help advance your career interests. Build a network of six or seven top performers who you trust and respect, broken down as follows:
By building alliances with people in different stages of their careers, you can benefit from diverse perspectives and knowledge. Just be sure to devote time to nurturing those relationships and be proactive in supporting your allies. High-quality professional allies, Koch says, yield high returns.
Follow These Steps to Create Allies at Work
Although Koch provides guidelines for the type of professional allies you should seek, he doesn’t clarify how to build those alliances. Here are some steps you can take to form mutually beneficial relationships at work:
Share your knowledge. If you have information that could help your colleagues do their work better or faster, share it with them. They’ll appreciate your support and will know they can count on you to look out for them in the future.
Make introductions that benefit your colleagues. If you think someone in your network could help a colleague, offer to make an introduction. This builds trust and lets your colleagues know that you care and that you have control in your sphere of influence.
Express gratitude when others help you. Be sure to thank your colleagues when they contribute to you. This makes others feel good and increases the chances they’ll want to help you in the future, opening the door to a potential long-term alliance.
According to Koch, you should aim to become self-employed as early in your career as possible. Initially, it might make sense to work for and learn from people who are already successful in your chosen field, but as soon as you have sufficient expertise, you should leave to become your own boss.
Why? Koch says that—as a top-performing employee—you’re not likely to be compensated at a level that reflects your contributions. Therefore, he recommends becoming your own boss so you get paid by results. Then, you should seek to employ as many top performers as possible so you capitalize on the profit-generating power of other people.
Do Self-Employed People Make More Money?
Research confirms Koch’s assertion that self-employed people earn more money than employees, but who has access to that greater wealth is uneven. Let’s examine the data.
On average, self-employed people are four times wealthier than their peers in the workforce. Specifically, the median net worth for self-employed families was $380,000 in 2019; for families of workers it was $90,000. However, it’s not clear if the self-employed started with greater wealth, if they created it, or both.
Also, research shows that white small business owners have 2.5 times more liquid wealth than Black small business owners and are more likely to employ paid workers. Thus, white business owners typically generate more sales and achieve higher profits than their Black peers. Nevertheless, one study found that Black and Latinx business owners have net worths ten times greater than their peers in the workforce, suggesting that—despite a persistent racial wealth gap—business ownership is still a powerful way for people of color to earn more money.
Finally, Koch recommends that you schedule and prioritize daily happiness practices. This will help you stay focused on the top 20% of activities that produce 80% of your happiness, thereby reinforcing habits that continue to multiply your freedom and success.
For example, take time every day to meditate, exercise, or do something nice for yourself. You have to prioritize your happiness, Koch says—if you don’t push to have it all, you’re guaranteed to never get it.
(Shortform note: Many people agree with Koch that we should schedule and prioritize our leisure and self-care activities, but they also caution against relating to this as another to-do list, which can add to our anxiety. To avoid anxiety, use this powerful mental trick: Think about your daily happiness practices not as things you have to do, but as things you get to do.)
By this point, you know how to apply the 80/20 Principle in your personal life. Now let’s examine how you can apply the 80/20 Principle in your business. In this section, we’ll examine the four steps you must take to boost your company’s success and profits: Analyze your business, increase your returns, simplify your systems, and make other strategic improvements.
As we mentioned previously, in any company we can predict that 80% of profits are generated by 20% of inputs in each domain, including customers, products, employees, and departments. How can you identify the top-performing 20% of those inputs? Koch says there are two methods: conducting an 80/20 Audit and applying 80/20 Reasoning. Let’s briefly review each method.
One option is to perform an 80/20 Audit (what Koch calls an 80/20 Analysis), which involves gathering two different sets of data—one measuring a percentage of all inputs and the other measuring a percentage of all outputs flowing from each of those inputs. For example, conduct an analysis to determine what percentage of your total profits come from sales of each product. Then, do a similar analysis to determine what percentage of total sales are completed by each salesperson, and continue doing this for all the variables related to your company’s key inputs and outputs. This process will reveal the top-performing inputs within your company.
Best Practices for Doing an 80/20 Audit and Getting the Most Benefit From Data
As Koch says, conducting an 80/20 Audit can reveal valuable insights into the top-performing inputs in your company. Research shows that companies around the world could collectively gain between $9.5 and $15.4 trillion in value through effective use of data. However, studies also show that only 20% of insights from data will actually deliver business outcomes. Why? Because many companies don’t follow recommended best practices, which Koch doesn’t cover. Here are three best practices you should follow:
First, secure total commitment from all decision-makers and stakeholders. If people make decisions based on intuition or incomplete knowledge, you will not be able to derive the most value from the data you collect. Therefore, all managers, executives, and team leaders need to be committed to gathering and analyzing data, and they must weave this approach into their day-to-day operations.
Second, make data and insights accessible and easy to understand. If people throughout your company are informed about the meaning of data and how it's being used in various departments, they’ll know how to align their actions in a way that benefits the company.
Third, refine your data collection and analysis processes continuously. As your company changes—through mergers and acquisitions, as well as new products and markets—you’ll need to gather new kinds of data and adjust the way you assess that data. By incorporating these best practices, you’ll be able to make the most of the 80/20 Audit Koch describes.
Another option, says Koch, is to engage in 80/20 Reasoning (what he calls 80/20 Thinking), which involves reflecting on observations you’ve made in your company, then acting on your insights. For example, maybe you’ve noticed that only a select few salespeople repeatedly earn quarterly bonuses for their high volume of sales, or you’re constantly having to reallocate resources because your North American branch fails to reach revenue goals. These insights will help you separate top-performing aspects of your business from those that underperform.
In contrast to the 80/20 Audit, 80/20 Reasoning does not involve rigorous data collection and analysis. Rather, it relies on broad observations and intuition. Thus, it’s possible that you could make some inaccurate assessments. However, Koch says that 80/20 Reasoning is faster, easier to execute, and less likely to mislead you than non-reflective, emotion-based thinking.
Koch says that you can use either of these methods to identify your top 20%, but he advises performing an 80/20 Audit when your issue is extremely important and complex. Gathering and analyzing data will increase your chances of making decisions that reflect underlying realities within the company.
How to Improve Your Critical Reasoning Abilities
Although Koch highlights the value of reflective, critical thinking, he doesn’t offer tips for how to do this well. Here are some steps you can take:
Define the specific problem you want to solve. Be clear about what you’re trying to achieve, then explore how you can get there.
Gather reliable information from multiple sources. Don’t rely on your view alone. Seek input from others you trust who have insight into a particular issue. Their unique experiences and knowledge will help expand your awareness about things you don’t know, allowing you to make more informed decisions.
Consider both short- and long-term consequences. A short-term fix may have adverse consequences in the long term. Think carefully about how things will likely unfold over time.
As Koch notes, applying 80/20 Reasoning is generally faster than gathering and analyzing data, which is incredibly useful when you need to solve problems quickly. However, you must be thorough and rigorous when you rely on this method so you increase your chances of producing the results you want.
Once you’re clear about which inputs are producing the vast majority of results, you have two choices to increase your company’s efficiency and profits, according to Koch. On the one hand, you can take steps to get even more out of the top 20% of critical inputs. For example, if 80% of profits come from 20% of customers, you could focus on improving your communication and service to those customers by sending them note cards in the mail, taking them to lunch, or giving them exclusive access to new products. Deepening these relationships will increase how much and how often customers buy from you.
(Shortform note: As Koch says, keeping good customers happy is smart business. Research shows that it costs five times as much to attract a new customer than to keep an existing one. An effective way to engage and re-engage customers, which Koch doesn’t mention, is to create a customer loyalty program that delivers value to customers beyond their initial purchase. By giving them access to promotional deals, you can keep customers interested and engaged in your company’s activities and products, even if they’re not ready to make a purchase right now. They’re more likely to pay attention to your ads, read your newsletters, and promote your products when they feel rewarded for their loyalty.)
On the other hand, you can take steps to increase your return from the bottom 80% of customers. For example, you could invest more in marketing activities that target that customer base or produce more of the products they tend to buy.
(Shortform note: Although Koch doesn’t elaborate much on how you can increase your return from low-profit customers, others recommend that you cluster these customers under a unified team composed of specialized sales and marketing professionals who focus exclusively on this customer segment. Then, that team can “micro-target” the best profit opportunities for these customers, and create highly focused programs that match their needs and interests.)
Just be sure, Koch advises, that you don’t apply the 80/20 Principle based on surface-level conclusions. Just because you’ve identified an 80/20 split doesn’t mean it’s the right one to focus on. For example, top customers who generate the most revenue might cost the most to serve and consistently insist on negotiating for a lower price, which results in a lower profit margin. Therefore, it might make more sense to identify which 20% of customers generate the highest profit margin and influence them to buy more. In the long term, this approach will have the highest return by increasing revenue and profits and saving labor costs.
(Shortform note: As Koch says, multiple variables can influence a given outcome, and it’s important to consider how these variables interact before committing to a course of action. Once you do that and decide what steps you’re going to take to increase returns, experts recommend that you formulate all strategies as hypotheses to be tested. To do this, clearly define the measures that would indicate you’ve proven or disproven the hypothesis prior to putting your plan into motion. This will allow you to assess whether your strategy was indeed successful and will give you more insight into how you can improve going forward.)
Once you’ve narrowed your focus on the factors within your company that you’re going to enhance, the next step is to simplify. Koch says that every company can identify unprofitable products, suppliers, customers, projects, and management structures. Therefore, to benefit fully from the 80/20 Principle, you should aim to eliminate wasteful complexity and simplify, which will allow you to reduce costs, increase profits, speed up operations, and deliver better value to customers. Let’s explore the three main ways Koch suggests to simplify your business.
(Shortform note: Most business analysts agree with Koch that companies should reduce complexity. But, in contrast to Koch, some say the biggest source of wasted resources is not overly complex systems and structures but rather an overly complicated business strategy. Even the most streamlined systems and structures will continue to be inefficient if they serve a convoluted strategy. For example, if a business hasn’t specified its target market in its overall strategy, it will likely waste time and money on ineffective marketing campaigns. Therefore, the first step in starting to simplify is to revisit your business strategy and affirm that it clearly communicates what you do, for whom, and how.)
One way to simplify is to outsource activities by contracting an outside party, which allows your team to focus on fewer things they do especially well. How do you decide what you should outsource and what you should keep in-house? Koch says the only activities you should keep in-house are those central to your company’s competitive advantage. For example, if your business sells custom jewelry, you wouldn’t outsource jewelry designing, but you could outsource marketing. An outside marketing company will produce better and faster results, giving you a much higher return than if you attempted to handle marketing in-house.
(Shortform note: Although Koch doesn’t mention any drawbacks of outsourcing, others note that you give up some control when you outsource to a non-employee because you’re not able to monitor how tasks are performed. Also, outsourcing could negatively impact company culture if employees feel like they are being replaced. Furthermore, you could risk public backlash if you take work overseas and your customer base has a moral stance against such a move.)
Another way to simplify is to reduce the number of suppliers, products, customers, or market segments within your company, eliminating what is least profitable. This has the dual benefit of freeing you to focus on the most profitable areas of your business and cutting costs tied to overhead and management.
(Shortform note: Others dispute Koch’s advice to always amplify your company. Sometimes, it helps to have a greater number of miscellaneous inputs. For example, a large base of suppliers has its advantages. Smaller suppliers often offer more flexible contract terms and more personal service, as well as more “niche” products, all of which can enable you to develop truly collaborative relationships that support innovation.)
Additionally, consider downsizing or eliminating management offices or positions. Koch says the main drawback of complex management structures is not so much their costs, but that they lead to business decisions that adversely affect the customer experience. Decision-makers rarely interact with customers, so decisions that sound good might have unintended consequences.
For example, managers may institute a rule that employees must limit customer service calls to five minutes, seeking to cut down on complaints about slow service. However, this results in less-friendly calls that don’t actually resolve customers’ issues, and customer complaints increase. Therefore, Koch says to cut down on management, which will free your staff to deliver superior value to customers and come up with creative solutions for doing things better.
(Shortform note: Many people concur with Koch that less management is better, leading to faster innovation, increased collaboration, and improved employee motivation. However, there are disadvantages, too, including a lengthier decision-making process because more people are involved in providing input. Also, you risk operating without a clear strategy if employees are making decisions at multiple levels, possibly leading them to work toward conflicting objectives.)
Finally, after you’ve streamlined your business, the next step is to identify ways you can improve so you can continue building profits as well as adding more value to your customers. Koch suggests four main ways to do this.
First, Koch suggests hiring more top performers like the top 20% you already have. To do so, he suggests looking beyond candidates' credentials to assess their personalities and attitudes, which are often stronger indicators of their potential to perform at a high level. Koch recommends gathering your current top performers in a room and working out what they have in common before you start recruiting. Also, ask your top performers to help you identify and recruit qualified candidates.
(Shortform note: Koch doesn’t elaborate on the value of getting referrals through current top employees, but this approach can save you time and money. Studies show that employee referrals reduce the “time-to-fill” by 40%, and companies spend 40% less hiring referrals than they do recruiting candidates from job boards.)
Second, Koch says that another way to increase sales is to get back in touch with previous satisfied customers. If customers bought from you in the past, they’re inclined to buy from you again (assuming they had a positive experience). So, assign your salespeople the task of calling old phone numbers to quickly increase your bottom line.
(Shortform note: Research backs up Koch’s claim that past customers are a worthy investment. On average, 65% of a company’s business comes from previous customers, and 86% of customers with great purchase experiences will buy from the same company again.)
The more people involved in a project, the easier it is for complexity—and inefficiency—to spiral out of control. Therefore, Koch thirdly recommends hiring a skilled project manager who will keep all employees focused on the 20% of critical tasks that really matter. This will improve efficiency and productivity, generating higher profits.
(Shortform note: As Koch notes, project management can lead to greater profitability. Other benefits include improved morale, reduced costs, and better collaboration. A good project manager will create a communication plan that keeps team members connected and clear about their roles so they can easily coordinate their efforts in the most efficient way, thereby allowing the company to do more with fewer resources and in as little time as possible.)
Fourth, Koch emphasizes that innovation is vital for your company’s future competitive success. Although we often think of innovation as difficult and expensive, Koch notes that small improvements and simple ideas can result in significant gains for your company. For example, you could save a lot of staff time by having them deliver services over the phone rather than in person, or by giving customers the option of scheduling appointments online without any assistance.
(Shortform note: How much should companies invest in innovation? Koch doesn’t say, but a survey of 1,000 companies revealed that, on average, businesses devote 3-4% of total revenue to innovation, with wide variation across industries and regions.)
Koch says we need to be ruthless in cutting down the time we spend on the 80% of people and activities that make us unhappy, and increase the time we spend on the 20% of people and activities that make us happy.
Describe the people, activities, and situations in your life that make you unhappy (for example, attending long meetings, cooking meals, or listening to a friend complain).
What actions can you take to reduce your exposure to those people or situations? (For example, consider whether you can stop attending some meetings, prepare meals in batches ahead of time, or cancel recurring get-togethers with negative friends.) Write down at least two ideas, no matter how far-fetched they may seem. (Remember: Koch says that happy, successful people find unconventional ways to use their time.)
Now, describe the people, activities, and situations in your life that make you happy (for example, doing yoga, talking to your best friend, or reading books).
What actions can you take to increase your exposure to those people or situations? (For example, consider whether you can take a yoga class during your lunch break, set up a weekly friend date, or join a book club.)