The 80-20 rule states that most effects come from a minority of causes. In this article, we explain how to use that to your advantage.
In the late 19th century, an Italian economist named Vilfredo Pareto noticed something unusual: Roughly 20 per cent of the peapods in his garden produced nearly 80 per cent of the peas.
This is not exactly front-page news, yet Pareto’s observation would provide the foundation for a powerful concept widely embraced by business leaders.
Not bad for a guy who had enough time on his hands to calculate the efficiency of his peapods.
These days, the 80-20 rule, also known as the Pareto Principle, is commonly used in the business world as a way for leaders to identify and maximise what actions, employees, products, and customers provide the greatest value.
The application of the rule may have shifted from Italian economist Vilfredo Pareto and his garden of pea plants, but the concept still remains. The Pareto Principle tells us that roughly 80 per cent of business outcomes come from 20 per cent of causes.
Those who apply the 80-20 rule to their business claim they can dramatically increase their productivity, profits, and even their free time.
Yaro Starak, a professional blogger and author who wrote an extensive article on how he uses the 80-20 rule in his life, explains: “I believe it’s fundamental to every business person — to every human being.”
Applying the Pareto Principle to your brand strategy, resource allocation, academic career, and even your personal to-do list can help you focus your attention on the tasks that bring the biggest returns.
In this guide, I’ll show you how to do just that. Let’s start by diving a little deeper into the history of the 80-20 concept.
A brief history of the 80-20 rule
Pareto put his name on the map because he noticed the 80-20 dynamic didn’t end in his garden. The more he looked around, the more the 80-20 principle appeared.
For example, he found that roughly 80 per cent of the land in Italy was owned by just about 20 per cent of the country’s population (i.e., most of Italy’s land was owned by the rich). Still, this doesn’t explain how the Pareto Principle fell into the laps of business owners and academics worldwide. For that, we need to head to America.
Management consultant Joseph Juran took the big leap several decades later by applying the 80-20 rule to the business world. Juran committed Pareto’s concept to writing, following his law of the “vital few and trivial many.”
Incidentally, it’s still called the ‘Pareto Principle’ today, likely because the ‘Juran Principle’ doesn’t have the same ring.
In modern times, the Pareto Principle has permeated every aspect of our professional and personal lives. It’s a key driving force behind business decisions in industries ranging from computer science and communications to fashion and fintech.
It’s an excellent way to decide where to focus your effort and when to delegate tasks. Ultimately, it will help you identify the most critical workflows that will yield the most results for your business. Let’s spend some time understanding how it works.
Understanding the Pareto Principle 80-20 rule
The basic concept behind the 80-20 rule is that a majority of results (roughly 80 per cent) come from a minority of causes (around 20 per cent) and is based on power laws and the amount of effort, suggesting that focusing on the most impactful activities yields better outcomes.
Those who embrace this concept seek to improve the efficiency, effectiveness, and profitability of their business by maximising the power of the 20 per cent that is providing the greatest gains and reducing the 80 per cent that is slowing down the company.
This rule isn’t exactly as reliable as the Law of Thermodynamics. Still, it is a consistent theme that business owners see repeatedly in almost every aspect of their business.
Yaro Starak explains, “The ratio won’t be exactly 80/20, but chances are if you look at many yey metrics in a business, there is definitely a minority creating a majority.”
Examples of the Pareto Principle
When Vilfredo sat pondering over peas all those years ago, he likely couldn’t have imagined the broad range of applications his theory would impact. Let’s take a peek into some of the real-world applications of Pareto’s Principle in the modern day.
Pareto Principle examples in business
The applications of the Pareto Principle are wide-ranging in business and project management. Here are five to consider.
- Sales: Organisations see time and time again that 80 per cent of revenue comes from just 20 per cent of customers. It’s little surprise that customer retention and loyalty are a huge business priority. It pays (literally) to keep your most valuable customers on board.
- Marketing: Ever realised that 80 per cent of your website traffic comes from 20 per cent of blogs, social media posts, and advertisements? What can you learn from this? Is there a certain type that always performs better? The Pareto rule can help you find and focus your attention on it.
- Time management tool: Consider that 80 per cent of your business’s productivity may come during just 20 per cent of the working day. While this rule isn’t a given, it offers food for thought. How can business owners optimise resources and manage workflows to leverage the most productive working hours?
- Inventory: Companies often find that just 20 per cent of their products drive 80 per cent of revenue. This can support resource allocation, aid with demand forecasting, and quality control, and even help with product creativity.
- Risk management: The Pareto Principle is crucial to any effective risk assessment. Identifying which risks will likely impact the business the most should they materialise will help companies decide which risks to avoid, mitigate, transfer, or accept.
The 80-20 rule will help with business management and productivity. It tells you exactly where to focus your efforts to optimise efficiency and grow your bottom line.
Pareto Principle examples in personal life
We all know the Pareto Principle is big news for business, but can it change your life on a personal level? That depends on how you look at it.
The Pareto Principle is, ultimately, a way of thinking. Applying it to your personal life can help you remove clutter and hone in on the tasks that are valuable to you. Once you realise those tasks, you can focus your energy and improve your daily life. That’s pretty revolutionary.
Pareto’s principle can be applied to your personal life in dozens of impactful ways. Here are three to think about:
- Healthy eating: Consider that 20 per cent of the foods we eat cause 80 per cent of weight gain. What would happen if you removed that 20 per cent from your diet? Eliminating junk food is a common practice for new healthy eating plans.
- Mental health: What do you spend 20 per cent of your time doing that gives you 80 per cent of your happiness? Hobbies? Spending your time with family? Socialising with friends? Applying the 80-20 rule to your own happiness can help you see which areas of your life you’ve been neglecting.
- Work: Many people have enormous task lists at work. However, consider which 20 per cent of these tasks will drive 80 per cent of the results. Those are the projects to focus on. As Dale Carnegie says: “Do the hard jobs first. The easy jobs will take care of themselves”.
Pareto’s theories can help you change your life for the better. The more you know about the 80-20s in your life, the easier it is to prioritise the tasks that keep you healthy, happy, and growing.
How do you use 80-20 for problem-solving?
The 80-20 rule is outstanding for decision-making. Following this simple process will help you identify problems and prioritise solutions.
For instance, let’s propose you have five primary problems you’d like to address: Supply chain disruption, poor marketing ROI, an understocked inventory, reduced customer satisfaction, and high employee turnover.
On the surface, each of these problems appears equally impactful. But let’s look deeper and analyse each in turn.
- Supply chain disruption: If our supply chain falters, we will need more products to ship to our customers and stock our shelves. We’d give this a severity of 9/10. It needs to be addressed quickly.
- Poor marketing ROI: Marketing ROI is something we can improve over time. It’s important, but there are more pressing matters that need to be addressed. Severity 5/10.
- Inventory understocked: This is concerning, but it isn’t going to cause our operation to fail anytime soon. This may also be a direct result of our supply chain disruption. Severity 4/10.
- High employee turnover: We should aim to identify the root cause of this issue. High turnover in our sales department may be impacting our loyal customers who expect personalised service. Severity 7/10.
- Reduced customer satisfaction: This is a critical concern, but when we address the other problems we’re facing, for example, quality control, this may fall into place. Severity 6/10.
Using the 80-20 rule, we can identify that a large proportion of our problems stem from supply chain disruption and high employee turnover. Therefore, we should focus most of our efforts on dealing with these concerns. From there, an understocked inventory will fix itself, and we can work toward improving customer satisfaction and marketing ROI over time. We’ve successfully identified the vital few and can make decisions accordingly.
This simplified Pareto analysis example highlights how the rule can be used to make more effective business decisions. It gets to the crux of problems and offers a framework for prioritising high-value tasks.
How to apply the 80-20 rule?
How else can you apply the 80-20 rule to your business? Let’s see what an 80-20 perspective would look like when applied to your personal workplace productivity, suite of products and services, employee management, and customer retention and acquisition.
How do you apply the 80-20 rule to your productivity?
This is both a tool of measurement and a mindset. You needn’t go any further than your own desk to test this perspective: Make yourself your first guinea pig and assess how you spend your day.
What activities do you spend your time on in the office, and how does each action contribute to your company’s bottom line?
If you’re like many business owners, you may notice that a few core activities contribute the most to your company’s growth. For example, perhaps the hour of networking you do once a week has yielded three major clients in the last month.
Starak explains that he earns most of his income by working two to four hours daily, writing articles, and developing podcasts. He admits that he hates doing the bookkeeping for his company or getting mired in SEO. “I leave these tasks, along with other activities like programming, graphic design, and proofreading, to other people, the specialists who enjoy them,” he writes.
Once you identify the activities that contribute most to the growth and profitability of your business, it’s time to take action. Scott Young of Lifehack counsels, “If email isn’t that important, your goal should be to reduce the time you spend on it. If meetings aren’t contributing, you should have shorter meetings.”
With the new time you’ve freed up, you can now focus more on the 20 per cent of activities that make the biggest difference to your business. Sign up for another networking group. Take more potential clients out to dinner. Or even go home an hour early each day. You can afford to treat yourself more efficiently when you design your workday.
How to apply the 80-20 rule to your products and services?
Let’s stretch this concept beyond the doors of your office. Take a long look at your inventory of products or services:
- Are a handful responsible for a majority of your income?
- Maybe you sell a ton of Product X, but you’re making much more on Product Y because its ROI is ten times that of Product X.
- Maybe you’re offering X and Y services for the same price, but it takes you four hours to complete X and two hours to complete Y.
Serial entrepreneur Dan Hanson shares a story of his early days growing his eBay business. “I realised that five of my 80 product SKUs generated 90 per cent of sales,” he says.
What did Hanson do with this information? He cut 75 of the lowest-performing products and developed five new products similar to his best performers. As a result, his sales doubled.
If you find that a small percentage of your products are responsible for most of your sales and profits, decide if you need those lower-performing products or services.
If nothing else, you should certainly allocate more time and marketing support for your best-performing products. Like Hanson, consider developing more products similar to your best sellers.
How to apply the 80-20 rule to your employees?
The beauty of the 80-20 rule is that it can be applied on both a micro and macro scale. Even as you begin to reshape your personal workday to maximise your most productive actions, you can also examine your employees and ask questions.
When Nick Hedges, the president of Velocify, looked at what separates great salespeople from the rest, he found that “only a fifth of salespeople almost always exceed quota on the average team.” (That’s 20 per cent of a sales team.)
Likewise, in its now famous Netflix Culture presentation, Netflix claims, “In procedural work, the best are two times better than the average. In creative/inventive work, the best are ten times better than the average.”
What sets these employees apart from the rest? Are they simply ‘better at their jobs’, or is there more at play? Perhaps they’re more incentivised and motivated. Maybe the organisation is the critical differentiator. Or, consider that the top performers may feel like they have more room for growth.
Once you understand the 80-20 rule, you can begin to hone in on these variables and determine what sets apart the overperformers from the underperformers. This will allow you to create a strategic plan to help your other employees get up to speed.
Similarly, you can use this strategy to reward your top 20 per cent better. Take the time to identify your highest-performing employees quantifiably. These people are the true engine of your company, and you must do what you can to keep them as long as possible, which may mean paying them what they’re truly worth, giving them more autonomy, and offering the benefits they need most.
Netflix doesn’t deviate from its commitment to hiring and keeping the best possible employees. “We’re a team, not a family,” the company’s culture presentation announces. “We’re like a pro sports team, not a kid’s recreational team. Netflix leaders hire, develop, and cut smartly, so we have stars in every position.”
To read more about how the 80-20 rule applies to your employees, Trent Hamm, author of The Simple Dollar, offers his views in an article for American Express.
Only a fifth of salespeople almost always exceed the quota on the average sales team. That means that 80% sometimes or often miss their quota.
What sets the top employees apart from the rest, for example:
- Do they hold themselves to higher standards?
- Are they incentivised enough?
- Do they believe in the company and its leadership?
- Are they organised?
According to Netflix, the best are two times better in procedural work than the average. In creative or inventive work, they are ten times better than the average.
How to apply the 80-20 rule to your customers?
Turn your gaze to one more major component of your business: your customers. It probably won’t surprise you to learn that only a small percentage of clients represent the bulk of profits for most businesses.
Yaro Starak found this to be the case with his business Better Edit, and you may find a similar trend when you look at where your profits are coming from. It’s also likely that a small percentage of your current customers are also responsible for the vast majority of complaints, problems, and extra work.
If you can identify both types of customers, you can take some action to improve your business dramatically. Find ways to affect change in your needy clients and only minimally affect your bottom line, all while freeing up vast amounts of time you could spend taking excellent care of your best clients. Furthermore, identify the shared characteristics of your best customers and then target new customers that fit that mould.
Anne Parys of Law Practice Today encourages business owners to “groom tomorrow’s 20 per cent.” She writes, “While they may not be bringing in the big bucks, some of your most ardent supporters can be found there . . . When they do have more business to bring, they’ll think of you first.”
How do we implement the 80-20 rule?
The true reason behind the 80-20 rule’s popularity is that it’s applicable in such a broad range of contexts. It’s helpful in everything from macro tasks like creating a new marketing campaign to micro-tasks like optimising a daily to-do list.
This also makes it considerably easier to explain how you can own contexts. Follow these steps to incorporate the 80-20 rule into any personal or professional task you like.
1. Identify the high-impact ‘vital few’ in your context
First, you should identify which 20 per cent of activities drive 80 per cent of your outcomes or results.
Conduct some original research and make a list of all the elements for your specific project. This could be a list of your staff, business problems, daily tasks, or anything else based on your context. From there, you need to identify the vital few. For example:
- Which tasks are truly the most important?
- Which employees have the highest impact on your sales?
- What problems are having the biggest impact?
- Which tasks are going to bring the biggest returns?
Identifying the vital few lets you prioritise your tasks based on importance and urgency.
2. Prioritise tasks and allocate resources accordingly
With an understanding of your critical 20 per cent, focus your resources, time, and budget on maximising those areas. Prioritise deepening relationships with your top 20 per cent of clients. Put in a business strategy to retain your top 20 per cent of employees. Complete your most important 20 per cent of tasks first thing in the morning.
This isn’t to say you should neglect the other 80 per cent. It’s simply a case of resource allocation. Rather than contributing a small portion of your time and energy to that 20 per cent, allocate more resources until it is roughly equal to the resources you allocate to the remaining 80 per cent.
3. Measure results and adjust as needed
The 80/20 rule is rarely static. Track the performance of your prioritisation to measure the effectiveness of your efforts. In business, KPIs are an excellent way to do so.
For instance, observe what happens to turnover rates, customer satisfaction, and sales figures when you allocate more resources to the top 20 per cent of your sales reps. Are these changes increasing productivity?
Continuously reapply the Pareto analysis to see whether the 20 per cent has shifted. This information can help you refine your approach the next time around.
Common misunderstandings about the 80-20 rule
The 80-20 rule isn’t the most misunderstood business principle of all time (we’d have to attribute that to “all publicity is good publicity”), and many organisations routinely misinterpret its meaning. Let’s dispel some common myths about the 80-20 rule:
Myth 1: The Pareto distribution is fixed
The 80/20 rule is great, sure. But what happens if it’s closer to 63/35?
There’s a common misconception that the 80/20 rule is always exactly 80/20, but let’s be honest — this is rarely the case. It’s not a perfect formula. It’s a general trend and a way of approaching tasks, not a golden rule.
Instead, don’t worry too much about the 80/20. Take the core message behind the principle and apply it to any situation where you feel the minority of causes leads to the most significant results.
Myth 2: The 80/20 rule means eliminating the 80 per cent
Just because a task is a low value doesn’t mean it’s unimportant. Your top 20 per cent of tasks will have a more significant impact, but if you leave your low-value tasks for long enough, they’ll eventually become more urgent and bring negative downsides.
Frame the 80/20 rule differently. It’s not about eliminating unimportant tasks. It’s about prioritising the most important tasks so you can drive the biggest results. All other tasks should be completed further down your to-do list or automated where possible. You can also delegate tasks to allow you to focus on the essentials.
Myth 3: The 80/20 rule is a quick fix
The 80/20 rule is helpful but isn’t a magic bullet that will solve all your problems in one night. Instead, the 80/20 rule allows you to focus your attention and allocate time, energy, and resources to the tasks that matter most and will yield the most results.
Once you’ve identified those tasks, the rest is up to you. The effort you put into completing those tasks comes from your dedication and hard work. That’s the one true key to building your business.
Summing up
Now that the 80-20 lenses are in front of your eyes, everywhere you look, you may see opportunities and the anchors that may hold your company back. Just by applying the 80-20 rule to your work habits like time management, products, employees, and customers, you may be able to revolutionise your business.
But only if you act. “Grasping the concept is relatively easy,” writes Strategex, a company that incorporates the 80-20 rule into its business consulting strategy, “but knowing what to do about it, how to do it, and how to sell it is the trick.”
Don’t be afraid to make big decisions based on the guidance of the 80-20 rule. When you cut the anchors away and focus on the small group of actions, products, employees, and customers that are working for you, then your business can quickly reap the rewards.
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