PDF Summary:The 80/20 Principle, by Richard Koch

If you’re resigned to working long hours for mediocre income, you need to read The 80/20 Principle. Entrepreneur Richard Koch reveals how you can work less, earn more, and multiply your happiness. How? Focus on the few things in your life that truly matter.

As Koch explains, 80% of results flow from 20% of inputs. According to this 80/20 Principle, only a fraction of the actions you take and the people you interact with contribute to your joy and success. Therefore, Koch says you must spend more time on what matters, and less time on what doesn't—for example, by finding work you enjoy, spending less time on things you're not good at, and avoiding people who drain your energy.

In this guide, we’ll examine the mindset changes Koch says you must make to take advantage of the 80/20 Principle and achieve success. We’ll also explore the scientific research behind key principles, such as how to revolutionize your view of time and the link between happiness and productivity.

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If you think this is unrealistic, remember: Koch says you must ditch your skepticism because you have more control over your life than you think. He asserts that most of what we’ve been taught to believe about advancing in our lives and careers is wrong. If we compromise and conform to expectations of working long hours, we’ll sacrifice our happiness and freedom and undermine our earning potential. So, Koch tells us to define our own “rules” by applying the 80/20 Principle.

Does Working Less Really Lead to Success, and Is It Even Possible?

Although Koch says that working less is key to multiplying our happiness and success—and that everyone can control how they allocate their time, to greater or lesser degrees—others challenge this assertion.

Researchers point out that many people do not have as much control over their life circumstances as Koch seems to imply. For example, people in poverty often have such an intense focus on stretching their scarce resources that it absorbs all their mental capacity. Thus, they have negligible “cognitive bandwidth” to pursue job training, education, leisure, or other activities that could help alleviate their suffering and lead them out of poverty. Further, people who deal with stressors such as discrimination, limited access to health care, and exposure to crime are highly susceptible to physical and mental disorders that limit their opportunities.

What about people at the opposite end of the earnings spectrum? Are they as free from hard work as Koch states? Many self-made millionaires say absolutely not. In fact, they attribute their success to working long, hard hours. For example, entrepreneur and Shark Tank star Daymond John says the secret to success comes down to one thing: work. He says that to succeed, people need to be all-in by allocating most of their time to their career ambitions. Ultimately, then, Koch’s prescription to work less is not necessarily a surefire path to success and might not be open to all.

Happy Life Tip #2: Do Work That You Love and Can Do Exceptionally Well

Aside from using time in creative ways, Koch says the key to happiness and success is to choose work you love and can do better than the vast majority of other people. According to Koch, it’s fruitless to spend time doing things you’re not great at—or trying to shore up your weaknesses—because doing so will erode your sense of self-worth and diminish productivity. Instead, you should focus on amplifying your strengths—your top 20% of skills that earn 80% of your success—to multiply your satisfaction and results.

When we excel at something, Koch says, we’re more likely to enjoy it, so these two qualifiers go hand-in-hand. And remember, according to Koch, enjoying your work helps you be more productive.

Is It Better to Ignore Weaknesses or Build on Them?

Whereas Koch advises us to ignore our weaknesses, others say we should build on them. One study found that 60% of leaders in a company made “significant positive change” when they worked to change their weaknesses. By focusing on your weaknesses, you can eliminate obstacles to personal and professional growth. For example, if you’re bad at public speaking and you want to take on a leadership role that requires facilitating meetings, you’d benefit from getting some training in this area. To start strengthening your weaknesses, take these steps:

• Identify what you want to improve. Be honest without being self-critical. Remember, you’re doing this to benefit your life and career, not punish yourself.

• Visualize success. Take time to consider the benefits of changing and the freedom it will provide you.

• Set clear goals. Be sure you have a way to assess your progress so you can make adjustments as needed and celebrate successes along the way.

• Get support from someone you trust. Reach out to a colleague, mentor, or professional coach who can help you improve.

If you embrace the process of building on your weaknesses as a challenge, it might make you feel more confident, contrary to what Koch says.

Happy Life Tip #3: Choose Valuable Allies and Nurture Important Relationships

No matter how independent and skilled you are, Koch says you will not achieve success on your own. You need allies. But don’t waste your time on low-quality relationships. Instead, choose your personal relationships and professional allies with extreme care. Only invest your time and energy in people who help you the most and make you happy.

In your personal life, Koch recommends that you only devote time to people who help you and bring you joy. Reduce—or ideally eliminate—the time you spend with people who take more than they give. For example, if you routinely spend time with a friend who complains about everything and never offers anything positive or motivating, it’s in your interest to end that relationship.

(Shortform note: Research supports Koch’s claim that spending time with people who make us happy improves the quality of our lives. Studies show that spending time with family and friends helps us cope with stress and boosts our happiness, even more so than increased income. Further, spending time with supportive family and friends gives us a stronger sense of purpose in life and can even benefit our physical health by lowering our blood pressure and pulse, thereby reducing our risk for cardiovascular disease.)

Koch provides guidelines for how to choose professional allies who can help advance your career interests. Build a network of six or seven top performers who you trust and respect, broken down as follows:

• One or two mentors with more industry experience than you
• Two or three professional peers with similar work experience
• One or two mentees who can keep you informed of emerging trends

By building alliances with people in different stages of their careers, you can benefit from diverse perspectives and knowledge. Just be sure to devote time to nurturing those relationships and be proactive in supporting your allies. High-quality professional allies, Koch says, yield high returns.

Follow These Steps to Create Allies at Work

Although Koch provides guidelines for the type of professional allies you should seek, he doesn’t clarify how to build those alliances. Here are some steps you can take to form mutually beneficial relationships at work:

• Share your knowledge. If you have information that could help your colleagues do their work better or faster, share it with them. They’ll appreciate your support and will know they can count on you to look out for them in the future.

• Make introductions that benefit your colleagues. If you think someone in your network could help a colleague, offer to make an introduction. This builds trust and lets your colleagues know that you care and that you have control in your sphere of influence.

• Express gratitude when others help you. Be sure to thank your colleagues when they contribute to you. This makes others feel good and increases the chances they’ll want to help you in the future, opening the door to a potential long-term alliance.

Happy Life Tip #4: Become Self-Employed

According to Koch, you should aim to become self-employed as early in your career as possible. Initially, it might make sense to work for and learn from people who are already successful in your chosen field, but as soon as you have sufficient expertise, you should leave to become your own boss.

Why? Koch says that—as a top-performing employee—you’re not likely to be compensated at a level that reflects your contributions. Therefore, he recommends becoming your own boss so you get paid by results. Then, you should seek to employ as many top performers as possible so you capitalize on the profit-generating power of other people.

Do Self-Employed People Make More Money?

Research confirms Koch’s assertion that self-employed people earn more money than employees, but who has access to that greater wealth is uneven. Let’s examine the data.

On average, self-employed people are four times wealthier than their peers in the workforce. Specifically, the median net worth for self-employed families was $380,000 in 2019; for families of workers it was $90,000. However, it’s not clear if the self-employed started with greater wealth, if they created it, or both.

Also, research shows that white small business owners have 2.5 times more liquid wealth than Black small business owners and are more likely to employ paid workers. Thus, white business owners typically generate more sales and achieve higher profits than their Black peers. Nevertheless, one study found that Black and Latinx business owners have net worths ten times greater than their peers in the workforce, suggesting that—despite a persistent racial wealth gap—business ownership is still a powerful way for people of color to earn more money.

Happy Life Tip #5: Establish a Daily Happiness Routine

Finally, Koch recommends that you schedule and prioritize daily happiness practices. This will help you stay focused on the top 20% of activities that produce 80% of your happiness, thereby reinforcing habits that continue to multiply your freedom and success.

For example, take time every day to meditate, exercise, or do something nice for yourself. You have to prioritize your happiness, Koch says—if you don’t push to have it all, you’re guaranteed to never get it.

(Shortform note: Many people agree with Koch that we should schedule and prioritize our leisure and self-care activities, but they also caution against relating to this as another to-do list, which can add to our anxiety. To avoid anxiety, use this powerful mental trick: Think about your daily happiness practices not as things you have to do, but as things you get to do.)

How to Streamline Your Business and Increase Profits

By this point, you know how to apply the 80/20 Principle in your personal life. Now let’s examine how you can apply the 80/20 Principle in your business. In this section, we’ll examine the four steps you must take to boost your company’s success and profits: Analyze your business, increase your returns, simplify your systems, and make other strategic improvements.

Step #1: Analyze Your Business With the 80/20 Principle

As we mentioned previously, in any company we can predict that 80% of profits are generated by 20% of inputs in each domain, including customers, products, employees, and departments. How can you identify the top-performing 20% of those inputs? Koch says there are two methods: conducting an 80/20 Audit and applying 80/20 Reasoning. Let’s briefly review each method.

Method #1: Conduct An 80/20 Audit

One option is to perform an 80/20 Audit (what Koch calls an 80/20 Analysis), which involves gathering two different sets of data—one measuring a percentage of all inputs and the other measuring a percentage of all outputs flowing from each of those inputs. For example, conduct an analysis to determine what percentage of your total profits come from sales of each product. Then, do a similar analysis to determine what percentage of total sales are completed by each salesperson, and continue doing this for all the variables related to your company’s key inputs and outputs. This process will reveal the top-performing inputs within your company.

Best Practices for Doing an 80/20 Audit and Getting the Most Benefit From Data

As Koch says, conducting an 80/20 Audit can reveal valuable insights into the top-performing inputs in your company. Research shows that companies around the world could collectively gain between $9.5 and $15.4 trillion in value through effective use of data. However, studies also show that only 20% of insights from data will actually deliver business outcomes. Why? Because many companies don’t follow recommended best practices, which Koch doesn’t cover. Here are three best practices you should follow:

First, secure total commitment from all decision-makers and stakeholders. If people make decisions based on intuition or incomplete knowledge, you will not be able to derive the most value from the data you collect. Therefore, all managers, executives, and team leaders need to be committed to gathering and analyzing data, and they must weave this approach into their day-to-day operations.

Second, make data and insights accessible and easy to understand. If people throughout your company are informed about the meaning of data and how it's being used in various departments, they’ll know how to align their actions in a way that benefits the company.

Third, refine your data collection and analysis processes continuously. As your company changes—through mergers and acquisitions, as well as new products and markets—you’ll need to gather new kinds of data and adjust the way you assess that data. By incorporating these best practices, you’ll be able to make the most of the 80/20 Audit Koch describes.

Method #2: Apply 80/20 Reasoning

Another option, says Koch, is to engage in 80/20 Reasoning (what he calls 80/20 Thinking), which involves reflecting on observations you’ve made in your company, then acting on your insights. For example, maybe you’ve noticed that only a select few salespeople repeatedly earn quarterly bonuses for their high volume of sales, or you’re constantly having to reallocate resources because your North American branch fails to reach revenue goals. These insights will help you separate top-performing aspects of your business from those that underperform.

In contrast to the 80/20 Audit, 80/20 Reasoning does not involve rigorous data collection and analysis. Rather, it relies on broad observations and intuition. Thus, it’s possible that you could make some inaccurate assessments. However, Koch says that 80/20 Reasoning is faster, easier to execute, and less likely to mislead you than non-reflective, emotion-based thinking.

Koch says that you can use either of these methods to identify your top 20%, but he advises performing an 80/20 Audit when your issue is extremely important and complex. Gathering and analyzing data will increase your chances of making decisions that reflect underlying realities within the company.

How to Improve Your Critical Reasoning Abilities

Although Koch highlights the value of reflective, critical thinking, he doesn’t offer tips for how to do this well. Here are some steps you can take:

• Define the specific problem you want to solve. Be clear about what you’re trying to achieve, then explore how you can get there.

• Gather reliable information from multiple sources. Don’t rely on your view alone. Seek input from others you trust who have insight into a particular issue. Their unique experiences and knowledge will help expand your awareness about things you don’t know, allowing you to make more informed decisions.

• Consider both short- and long-term consequences. A short-term fix may have adverse consequences in the long term. Think carefully about how things will likely unfold over time.

As Koch notes, applying 80/20 Reasoning is generally faster than gathering and analyzing data, which is incredibly useful when you need to solve problems quickly. However, you must be thorough and rigorous when you rely on this method so you increase your chances of producing the results you want.

Step #2: Increase Your Returns by Applying the 80/20 Principle

Once you’re clear about which inputs are producing the vast majority of results, you have two choices to increase your company’s efficiency and profits, according to Koch. On the one hand, you can take steps to get even more out of the top 20% of critical inputs. For example, if 80% of profits come from 20% of customers, you could focus on improving your communication and service to those customers by sending them note cards in the mail, taking them to lunch, or giving them exclusive access to new products. Deepening these relationships will increase how much and how often customers buy from you.

(Shortform note: As Koch says, keeping good customers happy is smart business. Research shows that it costs five times as much to attract a new customer than to keep an existing one. An effective way to engage and re-engage customers, which Koch doesn’t mention, is to create a customer loyalty program that delivers value to customers beyond their initial purchase. By giving them access to promotional deals, you can keep customers interested and engaged in your company’s activities and products, even if they’re not ready to make a purchase right now. They’re more likely to pay attention to your ads, read your newsletters, and promote your products when they feel rewarded for their loyalty.)

On the other hand, you can take steps to increase your return from the bottom 80% of customers. For example, you could invest more in marketing activities that target that customer base or produce more of the products they tend to buy.

(Shortform note: Although Koch doesn’t elaborate much on how you can increase your return from low-profit customers, others recommend that you cluster these customers under a unified team composed of specialized sales and marketing professionals who focus exclusively on this customer segment. Then, that team can “micro-target” the best profit opportunities for these customers, and create highly focused programs that match their needs and interests.)

Just be sure, Koch advises, that you don’t apply the 80/20 Principle based on surface-level conclusions. Just because you’ve identified an 80/20 split doesn’t mean it’s the right one to focus on. For example, top customers who generate the most revenue might cost the most to serve and consistently insist on negotiating for a lower price, which results in a lower profit margin. Therefore, it might make more sense to identify which 20% of customers generate the highest profit margin and influence them to buy more. In the long term, this approach will have the highest return by increasing revenue and profits and saving labor costs.

(Shortform note: As Koch says, multiple variables can influence a given outcome, and it’s important to consider how these variables interact before committing to a course of action. Once you do that and decide what steps you’re going to take to increase returns, experts recommend that you formulate all strategies as hypotheses to be tested. To do this, clearly define the measures that would indicate you’ve proven or disproven the hypothesis prior to putting your plan into motion. This will allow you to assess whether your strategy was indeed successful and will give you more insight into how you can improve going forward.)

Step #3: Simplify the Systems in Your Business

Once you’ve narrowed your focus on the factors within your company that you’re going to enhance, the next step is to simplify. Koch says that every company can identify unprofitable products, suppliers, customers, projects, and management structures. Therefore, to benefit fully from the 80/20 Principle, you should aim to eliminate wasteful complexity and simplify, which will allow you to reduce costs, increase profits, speed up operations, and deliver better value to customers. Let’s explore the three main ways Koch suggests to simplify your business.

(Shortform note: Most business analysts agree with Koch that companies should reduce complexity. But, in contrast to Koch, some say the biggest source of wasted resources is not overly complex systems and structures but rather an overly complicated business strategy. Even the most streamlined systems and structures will continue to be inefficient if they serve a convoluted strategy. For example, if a business hasn’t specified its target market in its overall strategy, it will likely waste time and money on ineffective marketing campaigns. Therefore, the first step in starting to simplify is to revisit your business strategy and affirm that it clearly communicates what you do, for whom, and how.)

Simplification Tip #1: Outsource Activities

One way to simplify is to outsource activities by contracting an outside party, which allows your team to focus on fewer things they do especially well. How do you decide what you should outsource and what you should keep in-house? Koch says the only activities you should keep in-house are those central to your company’s competitive advantage. For example, if your business sells custom jewelry, you wouldn’t outsource jewelry designing, but you could outsource marketing. An outside marketing company will produce better and faster results, giving you a much higher return than if you attempted to handle marketing in-house.

(Shortform note: Although Koch doesn’t mention any drawbacks of outsourcing, others note that you give up some control when you outsource to a non-employee because you’re not able to monitor how tasks are performed. Also, outsourcing could negatively impact company culture if employees feel like they are being replaced. Furthermore, you could risk public backlash if you take work overseas and your customer base has a moral stance against such a move.)

Simplification Tip #2: Reduce the Number of Miscellaneous Inputs

Another way to simplify is to reduce the number of suppliers, products, customers, or market segments within your company, eliminating what is least profitable. This has the dual benefit of freeing you to focus on the most profitable areas of your business and cutting costs tied to overhead and management.

(Shortform note: Others dispute Koch’s advice to always amplify your company. Sometimes, it helps to have a greater number of miscellaneous inputs. For example, a large base of suppliers has its advantages. Smaller suppliers often offer more flexible contract terms and more personal service, as well as more “niche” products, all of which can enable you to develop truly collaborative relationships that support innovation.)

Simplification Tip #3: Downsize Management

Additionally, consider downsizing or eliminating management offices or positions. Koch says the main drawback of complex management structures is not so much their costs, but that they lead to business decisions that adversely affect the customer experience. Decision-makers rarely interact with customers, so decisions that sound good might have unintended consequences.

For example, managers may institute a rule that employees must limit customer service calls to five minutes, seeking to cut down on complaints about slow service. However, this results in less-friendly calls that don’t actually resolve customers’ issues, and customer complaints increase. Therefore, Koch says to cut down on management, which will free your staff to deliver superior value to customers and come up with creative solutions for doing things better.

(Shortform note: Many people concur with Koch that less management is better, leading to faster innovation, increased collaboration, and improved employee motivation. However, there are disadvantages, too, including a lengthier decision-making process because more people are involved in providing input. Also, you risk operating without a clear strategy if employees are making decisions at multiple levels, possibly leading them to work toward conflicting objectives.)

Step #4: Make Other Strategic Improvements

Finally, after you’ve streamlined your business, the next step is to identify ways you can improve so you can continue building profits as well as adding more value to your customers. Koch suggests four main ways to do this.

Strategic Improvement Tip #1: Hire More Top Performers

First, Koch suggests hiring more top performers like the top 20% you already have. To do so, he suggests looking beyond candidates' credentials to assess their personalities and attitudes, which are often stronger indicators of their potential to perform at a high level. Koch recommends gathering your current top performers in a room and working out what they have in common before you start recruiting. Also, ask your top performers to help you identify and recruit qualified candidates.

(Shortform note: Koch doesn’t elaborate on the value of getting referrals through current top employees, but this approach can save you time and money. Studies show that employee referrals reduce the “time-to-fill” by 40%, and companies spend 40% less hiring referrals than they do recruiting candidates from job boards.)

Strategic Improvement Tip #2: Revisit Past Customers

Second, Koch says that another way to increase sales is to get back in touch with previous satisfied customers. If customers bought from you in the past, they’re inclined to buy from you again (assuming they had a positive experience). So, assign your salespeople the task of calling old phone numbers to quickly increase your bottom line.

(Shortform note: Research backs up Koch’s claim that past customers are a worthy investment. On average, 65% of a company’s business comes from previous customers, and 86% of customers with great purchase experiences will buy from the same company again.)

Strategic Improvement Tip #3: Hire a Project Manager

The more people involved in a project, the easier it is for complexity—and inefficiency—to spiral out of control. Therefore, Koch thirdly recommends hiring a skilled project manager who will keep all employees focused on the 20% of critical tasks that really matter. This will improve efficiency and productivity, generating higher profits.

(Shortform note: As Koch notes, project management can lead to greater profitability. Other benefits include improved morale, reduced costs, and better collaboration. A good project manager will create a communication plan that keeps team members connected and clear about their roles so they can easily coordinate their efforts in the most efficient way, thereby allowing the company to do more with fewer resources and in as little time as possible.)

Strategic Improvement Tip #4: Innovate New High-Performing Products or Practices

Fourth, Koch emphasizes that innovation is vital for your company’s future competitive success. Although we often think of innovation as difficult and expensive, Koch notes that small improvements and simple ideas can result in significant gains for your company. For example, you could save a lot of staff time by having them deliver services over the phone rather than in person, or by giving customers the option of scheduling appointments online without any assistance.

(Shortform note: How much should companies invest in innovation? Koch doesn’t say, but a survey of 1,000 companies revealed that, on average, businesses devote 3-4% of total revenue to innovation, with wide variation across industries and regions.)