What is the 80/20 Rule?

by Brian Bagnall

In 1906, Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal distribution of wealth in his country, observing that twenty percent of the people owned eighty percent of the wealth. In the late 1940’s, Dr. Joseph M. Juran inaccurately attributed the 80/20 Rule to Pareto, calling it Pareto’s Principle. While it may be misnamed, Pareto’s Principle or Pareto’s Law as it is sometimes called, can be a very effective tool to help your business.

Where It Came From

After Pareto made his observation and created his formula, many others observed similar phenomena in their own areas of expertise. Quality Management pioneer, Dr. Joseph Juran, working in the US in the 1930’s and 40’s recognized a universal principle he called the “vital few and trivial many” and reduced it to writing. In an early work, a lack of precision on Juran’s part made it appear that he was applying Pareto’s observations about economics to a broader body of work. The name Pareto’s Principle stuck, probably because it sounded better than Juran’s Principle.

As a result, Dr. Juran’s observation of the “vital few and trivial many,” the principle that 20 percent of something always are responsible for 80 perfect of the results, became known as Pareto’s Principle or the 80/20 rule.

What It Means

The 80/20 Rule means that in anything a few (20 percent) are vital and many (80 percent) are trivial. In Pareto’s case it meant 20 percent of the people owned 80 percent of the wealth. In Juran’s initial work he identified 20 percent of the defects causing 80 percent of the problems. Project Managers know that 20 percent of the work (the first 10 percent and the last 10 percent) consume 80 percent of your time and resources. You can apply the 80/20 Rule to almost anything, from the science of management to the physical world.

You know 20 percent of your stock takes up 80 percent of your warehouse space and that 80 percent of your stock comes from 20 percent of your suppliers. Also 80 percent of your sales will come from 20 percent of your sales staff. 20 percent of your staff will cause 80 percent of your problems, but another 20 percent of your staff will provide 80 percent of your production. It works both ways.

How It Can Help You

The value of the Pareto Principle for a manager is that it reminds you to focus on the 20 percent that matters. Of the things you do during your day, only 20 percent really matter. Those 20 percent produce 80 percent of your results. Identify and focus on those things. When the fire drills of the day begin to sap your time, remind yourseld of the 20 percent you need to focus on. If something in the schedule has to slip, if something isn’t going to get done, make sure it’s not part of that 20 percent.

There is a management theory floating around at the moment that proposes to interpret Pareto’s Principle in such a way as to produce what is called Superstar Management. The theory’s supporters claim that since 20 percent of your people produce 80 percent of your results you should focus your limited time on managing only that 20 percent, the superstars. The theory is flawed, as we are discussing here because it overlooks the fact that 80 percent of your time should be spent doing what is really important. Helping the good become better is a better use of your time than helping the great become terrific. Apply the Pareto Principle to all you do, but use it wisely.

Manage the Issue

Pareto’s Principle, the 80/20 Rule, should serve as a daily reminder to focus 80 percent of your time and energy on the 20 percent of your work that is really imporant. Don’t just “work smart,” work smart on the right things.

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What is the 80/20 Principle?

The 80/20 Principle asserts that there is an inbuilt balance between inputs and outputs, causes and consequences, and effort and result. It states that a minority of causes, inputs or effort usually lead to a majority of the result, outputs or rewards. A few things are important; most are not.

A good benchmark for this imbalance is provided by the 80/20 relationship: a typical pattern shows that 80% of outputs result from 20% of inputs; that 80% of consequences flow from 20% of causes; or that 80% of results come from 20% of effort. It reflects relationships in nature, which are an intricate mixture or order and disorder, or regularity and irregularity.

The 80/20 Principle involves a static breakdown of causes at any one time, as opposite to change over time. “The art of using the 80/20 Principle is to identify which way the grain of reality is currently running and exploit that as much as possible.”

The 8020 numbers are only a metaphor and a useful benchmark. The real relationship may be more or less unbalanced than 80/20 The 80/20 Principle asserts, however, that in most cases the relationship is very likely to be unbalanced and close to 80/20.

The 80/20 Principle is extremely versatile. “It can be profitably applied to any industry and any organization, any function within an organization and any individual job.” It helps you identify all the forces beneath the surface, so that you can give maximum power to the most productive forces and stop the negative influences.

Achieving Progress by Applying 80/20 Principle

80/20 Principle is inherently optimistic because it reveals a state of affairs that is seriously below what it should be and shows the direction towards a better state. To achieve progress and multiply your output, you must give power to the 20% of resources that really matter in terms of achievement, and get the remaining 80% up to a reasonable level. “Progress takes you to a new and much higher level. But, even at this level, there will still typically be an 80/20 distribution of outputs/inputs. So you can progress again to a much higher level.”

80/20 Analysis

80/20 Analysis examines the relationships between two sets of comparable data and can be used to change the relationships it describes. One its use is to discover the key causes of the relationship, the 20% of inputs that lead to 80% of outputs, and put your resources behind the best-performing efforts. The second main use of 80/20 Analysis is to improve the effectiveness of the underperforming 80% of inputs that contribute only 20% of the output.

80/20 Analysis should be applied carefully, in a systematic way, as opposite to linear thinking that may lead to misunderstanding of the 80/20 Principle and its potential abuses. “Don’t be seduced into thinking that the variable that everyone else is looking at… is what really matters. This is linear thinking. The most valuable insight from 80/20 Analysis will always come from examining non-linear relationships that others are neglecting.”

80/20 Thinking

80/20 Thinking, applied to your daily life, can help you change behavior and to concentrate on the most important 20%. Action resulting from 80/20 Thinking should lead you to achieve much more with much less. To engage in 80/20 Thinking, you must constantly ask yourself: what is the 20% that is leading to 80%? Never assume that you automatically know what the answer is, but take some time to think creatively about it. “For every ounce of insight generated quantitatively, there must be many pounds of insight arrived at intuitively and impressionistically.”

Here’s is what we cover:

80 percent of what you accomplish in your business comes from 20 percent of the time you spent working.
20 percent of a business company’s product usually account for 80 percent of it’s sales
Find out which 20 percent of their marketing is motivating the most sales which allows you to reduce your marketing budget
Find out which 20 percent of your customers are producing 80 percent of the profits… learn how to focus your time and energies keeping these customers happy and increase business transactions with them… tap them for their referral power because they are your satisfied customers.
Find out which 20 percent of your customer prospects are most likely to become buyers
80 percent of all problems are caused by 20 percent of manufacturing defects.
20 percent of your staff and co-workers give you 80 percent of all the support you need.
80 percent of your knowledge comes from 20% of your reading and education
completing 20% of your to-do list will be
I’ll show you how to setup your marketing efforts to automatically tell you who the top 20% are
I’ll teach you how to get your customers to purchase more often, graduate towards making bigger ticket purchases, generating much more profits, make even bigger purchases with cross-sells and up-sells
80% of the profits made in your industry are made by 20% of firms… I’ll teach you how to get in the top 20%
80% of the benefit from any product or service can be provided at 20% of the cost
80% of your resources are producing only 20% of value