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I heard about Pareto Principle for the first time in 2011, while reading $100 Startup, by Chris. On the last book I read, Personal MBA, by Josh Kaufman, I saw this concept again. And then a story that I heard long ago finally made sense.
Every company is made by people and processes. In this very complex universe, a few inputs generate most of the outputs. That non-linear pattern is called Pareto Principle aka 80/20 principle. The funniest fact is that both of these principles can be applied to our daily life. Here are a few examples:
- Usually, we use less than 20% of the clothes we have in our closet, at 80% of the time.
- Usually, less than 20% of the clients are responsible for more than 80% of the revenues.
- Usually, we communicate more than 80% of our time with less than 20% of our acquaintances.
So, what does this principle want to show us? It shows that we have to focus on the right inputs, in order to generate most of the results/outputs we want.
Back to the beginning of the blog post. A while ago, I heard the story of a company of construction materials from Bragança that lowered half of its fixed costs, while keeping the billing level and increasing the profits. All that without firing anyone. Impressive, isn’t it?
That example, together with Pareto Principle, made me realize that if you have a concept or principle that is strongly related to your business, the usage of that principle may be the origin of your Aha Moment. In fact, acknowledging that concept, rule or principle can be your Aha Moment!
From the 45 clients of that company, 12 represented over 90% of the company’s billings. Focusing on these 12 clients, the administration discovered that they could easily reduce their fixed costs by more than 50% and still profit.
But (and here’s our lesson) most of the problems, nuisances, and headaches came from 4 clients that were part of the 33 clients that the administration decided to “fire”. Guess what? These 4 clients only represented about 10% of the company’s profit.
And, yes, the company didn’t fire contributors, they fired clients… Sometimes it only takes a minute to look from the outside and notice that the solution to many of our problems is already in front of us.