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20 principle

Work out the 20% of products and activities that give you 80% of your profits. Then double or treble their revenues. Put little or no effort into the less profitable 80%. Eliminate loss-makers.

Do the same for customers — identify the 20% who give you 80% of your profits. Sell more to them and to people like them. Raise prices or reduce costs and effort on the other 80% of customers.

Make your business as simple as possible. Identify the simplest 20% and examine its profitability. If it makes 80% or more of your profits, focus exclusively on the simple 20% and cut out everything else.

Identify the 50% of your customers, products, components and suppliers that add the least to revenues and profits. Getting rid of the bottom 50% is a great way to reduce complexity. That enables you to focus on the 50% that matters at all, and the 20% that matters a great deal.

The 80/20 principle implies that the top 20% of your people are worth 16 times more per person than the bottom 80%. Identify the top 20% and see if this could be true for your business. If it is, make sure you keep the top 20% and find other recruits like them.

20% of your activities are likely to happen many times faster than the other 80%, and also be many times more profitable. What are the few things that happen much faster than most things? Check and see how profitable they are. If they are super-profitable, do more of them.

Extract from the 80/20 principle by Richard Koch – 80/20 insights for those running a business

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