‘The key to success is to focus our conscious mind on things
we desire not things we fear.’ – Brian Tracy
In 1906 Italian economist Vilfredo Pareto discovered that 80% of the land in Italy was owned by 20% of the people. He conducted similar studies in other countries with similar results. Ironically, he also noticed the same principle applied to nature, as he discovered in his garden that only 20% of the pea pods contained 80% of the peas. In fact, unknowingly, he had stumbled upon an important universal principle that 80% of the effect comes from approximately 20% of the causes. This principle later became known as the Pareto Principle, in recognition, of Vilfredo’s contribution to its discovery.
This is a remarkably consistent law that exists in many aspects of our lives, for instance:
- The majority of the revenue from most companies comes from a minority of customers.
- The majority of the sales growth of a business tends to come from a very small number of products or services.
- Most of the personal wealth creation comes from a small number of sources (such as a principle residence, pension, investment or owned business).
- About 80% of the successful projects in a company typically involve a small, but highly productive group of people.
- Most of the taxes paid to the government come from a small percentage of the population. (According to The Wall Street Journal, in 2014, the top 20% of US income earners, paid 84% of the taxes).
Once you grasp this principle, it can become a very powerful tool in your toolkit to help you achieve greater results. You can control the vast majority of a result in multiple aspects of your life, by focusing your effort, and attention, on a small minority of the causes. To be effective, you need to consistently focus on the few actions that will bring you the greatest returns.
Putting the Pareto Principle into Action:
To Grow Wealth. Make a list of all the actions that are most likely to create wealth, such as your job, investments, rental properties, businesses, pensions, etc. Be objective and get an external perspective from someone who has successfully grown wealth. Prioritize the list, and then focus most of your effort on only the top one or two items. Ignore the remaining items and stay focused on the top one or two. Over time, this strategy will give you the greatest possibility for wealth expansion.
Expand Health. Make a list of the items that contribute most to a healthy lifestyle. The list will likely include: healthy eating, active living, low stress, proper sleep. Then make sure you focus your attention on the top one or two items. According to a recent research by the University of Utah Nutrition Clinic summarizing 700 studies on weight loss, about 75% of weight loss is attributed to diet and 25% to exercise. Get the facts and focus.
Growing Your Business. Most executives are far too distracted and scattered when it comes to creating enterprise value. The math is simple. Value is a multiple of profit, so if you want to increase value, focus on increasing profit. Increasing profit is mostly a function of higher revenue, so increase revenue. Increasing revenue is a function of more sales, so increase sale. To apply the Pareto Principle to your business find out the few things that causes more sales and focus on them!
Generally, to leverage the Pareto Principle, make a list of all of the items contributing to your success and zero in on the one or two biggest contributors. Focus on those first, and ignore the rest for now. I am not suggesting that you ignore all the other factors, but that you recognize that you can make substantial improvement by focusing your effort on addressing the biggest factors first, and then, when you have achieved satisfactory results, move onto the next biggest factors.
Eamonn has a B. Eng. (Electrical) from Lakehead University, MBA (Finance) from University of Toronto, and has completed Executive Education at Stanford University Graduate School of Business. He lives in Vancouver, Canada. Follow him on twitter @EamonnPercy.