Pareto's Principle – The 80/20 rule

Introduction to 80-20

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 1940s, 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 you manage effectively.

How to use the 80-20 rule

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.

More generally, the Pareto Principle is the observation (not a ‘law’) that most things in life are not distributed evenly. It can mean all of the following things:

• 20% of the input creates 80% of the result
• 20% of the workers produce 80% of the result
• 20% of the customers create 80% of the revenue
• 20% of the bugs cause 80% of the crashes
• 20% of the features cause 80% of the usage
• And on and on… (the traditional bell curve)

But be careful when using this idea! First, there’s a common misconception that the numbers 20 and 80 must add to 100 — they don’t!

The vital few

The Pareto principle (20-80 rule, or law of the vital few) suggests that for many 80% of consequences stem from 20% of the causes. The idea has rule-of-thumb application in many places, but it’s also commonly and unthinkingly misused.

In time management – 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 you work that is really important. Don’t just “work smart”, work smart on the right things.

The principle in action in your business

Here are some 80/20 business applications:

• Does 20 percent of your sales force produce 80 percent of revenues?
• Do 20 percent of your products account for 80 percent of product sales?
• Do 80 percent of your visitors see only 20 percent of your Web site pages?
• Do 80 percent of delays arise from 20 percent of the possible causes of delay?
• Do 80 percent of customer complaints arise from 20 percent of your products or services?

Pareto principle, pareto diagram, pareto analysis – Vilfredo Pareto, (1848-1923) an Italian economist and professor of political economics at Lausanne University, first discovered the 80:20 ‘rule’ of ‘predictable imbalance’, that provides a basis for focusing on the 20% of activities that generate 80% of results, or the 20% of failures that are responsible for 80% of the waste, etc.

The Pareto Principle is also known as The Parato law. The Principle Of Least Effort, and The Principle Of Imbalance, which in themselves provide an example of the Pareto Principle in action because despite all the options, hardly anyone ever uses any other name than ‘The 80:20 Rule‘

Remember like any tool, this is only as effective as its context and application.