The Pareto principle

I have noticed something interesting in our small manufacturing business. Most of the sales come from a handful of customers. Actually, about 80% of sales come from 20% of the customers. Same thing with costs. 80% of the costs can be attributed to a handful of cost drivers. The same trend can be observed with our product portfolio. Most sales are attributable to a single product. This may look weird to the untrained observer but this is a very natural phenomenon that can be found throughout nature.

In 1896 a guy named Vilfredo Pareto from Italy had a nice little garden in his backyard and he noticed something strange one day! It seemed to him that most of the fruit in the garden was only coming from a few plants. Being an economist, he ran the numbers and found that about 20% of the plants were bearing 80% of the fruits. Intrigued, he expanded his inquiry into other things like land ownership. Pareto observed that 80% of the land in Italy was owned by only 20% of the population. In fact, it turned out that most of the wealth in Italy was actually owned by only 20% of the population. This principle where 80% of consequences come from 20% of causes has since come to be known as the Pareto Principle.  

The Pareto principle is closely linked to the Mathew principle in the bible which basically says that to those who have more shall be given to them and those who don’t have even the little will be taken away. Now, this sounds unfair but it is the reality of life.

So how can we use the Pareto principle and the Mathew principle to our advantage? To answer this question we need to explore another theory called the razor’s edge. The principle behind the razor’s edge is that the difference between winning and losing is a very thin line. It doesn’t take tremendously more effort to win in life. For example, a gold Olympiad usually wins a race by a few milliseconds. These few milliseconds result in out-sized fortunes for the winner compared to the first and second runner-up. We just need to focus on a few things which have a tremendous effect on the outcome we seek. In other words, by really becoming good at the vital few and largely ignoring the trivial many we can largely accelerate winning in a certain area of life. Now, once we begin winning in a few areas the Mathew principle takes over and we start winning more in life. Eventually, the effects of long-term compounding set in, and success becomes automatic.

Suppose for instance you have a low-end job that pays very little. You’re unsatisfied with your lot in life and begin to demand more from life. You resolve to climb up the success ladder. You decide to upgrade your skills. Say you are a cleaner and you decide to enroll in evening classes to pursue a qualification in accounting. You start coming very early to work and leaving very late while reading. You start doing your work in time. You are more focused. There is a renewed zeal in your life. You ask to volunteer in the accounts department on top of your cleaning job. There is a renewed enthusiasm about you. Your boss notices and begins to give you more assignments. You now enjoy your work more. The small wins start adding up which reinforces your journey. You pass a few papers and eventually gain a qualification. By this time you’re adding way more value to your organization. Your bosses realize they may lose a good worker and promote you to a clerk in the accounts department. Your pay suddenly increases and life takes on a new meaning. The simple action of upgrading your skills has totally transformed your entire life.

As you can see these principles work in reverse as well. 80% of your problems come from only 20% of causes. Simply fixing a few things in your life can produce incredible outcomes. Be careful of failing too often because you will only fail more because of the Mathew principle. For instance, if you have no job, no money and you just sit on the sofa watching TV life is just going to get worse for you!

So remember to focus on the vital few instead of the trivial many and make sure you win something small every day; for those who have more shall be added to them! 

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