80/20 (Pareto Principle)

80/20 (Pareto Principle)

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The Pareto Principle, also known as the 80/20 rule originates from Italian economist Vilfredo Pareto. The principle states that “for many events, roughly 80% of the effects come from 20% of the causes” (sourced from Wikipedia). Pareto observed that 80% of the land in Italy was owned by 20% of the population (sourced from Entrepreneurs Journey).

This principle is generalized to many businesses and industries. Taking the core concept, the idea is that 80% of the value is derived from 20% of the effort or cost.

One of the Ways We Apply the Pareto Principle

When purchasing items, don’t just buy the first thing you find. Use the Pareto Principle to assist you in buying the best valued item for your needs. Here’s how to apply it:

  • Find the low-end version of an item and the high-end version.
    • Amazon is a great tool for this
  • Compare and contrast the two items
    • Note the price difference
    • Note the value difference (through feature comparison)
  • Objectively make a list of what features are ‘must-haves’
  • Objectively make a list of what features are ‘like-to-haves’
  • Find the least expensive version of the item with your ‘must-haves’
    • Use eBay or Amazon
  • Then, find a couple of items that are one or two levels above the base item in terms of cost and features (more features and more expensive).
  • Evaluate your 3-4 items and objectively determine the best value, with cost versus features.
    • Ask, “The features of this item adds what value or amenity?”
    • Ask, “Are the features of this item worth the additional cost?”
  • Now, you have a good objective and in many cases a qualitative analysis of the item and options. Use this data to pick the best item for your needs.
  • TIP: The more important and more expensive items generally deserve a closer, longer, and more thorough analysis. Keeping the value of our time in mind, when we’re looking at less expensive items, we do this analysis much more quickly and with less detail.

 

 

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