The 80-20 Principle states that 80% of the effects come from 20% of the causes. Also known as the Pareto Principle, has been applicable to processes since the 1900s. When observed by Vilfredo Pareto, 20% of the population, in Italy, received 80% of the income.
One of the business case studies that has displayed the 80-20 Principle is that in the HP Foods. Small units that formed just 15% of the sales, made 120% of the profits. In an online business however, this principle was lacking. A reverse Pareto Principle was implemented, which although resulted in a loss of a handful of customers, but made a 30% increment in profit.
To make money, one has to search for the 5% of the businesses that have sustained themselves in the top tier over a long period of time. Richard Koch is of the view that cutting cost smartly can leverage the company’s profitability, and bring it in line with the 80-20 Principle.
He says that if a company wishes to renovate its entire process, and yet follow the Pareto Principle, it has to find profitable customers and has to make incremental yet effective changes in pricing as both are low risk ventures, which provide quick payback.