The 80-20 rule (also known as the Pareto principle): what it is, how it works (2024)

What is the 80-20 rule?

The 80-20 rule, also known asThe Pareto principle, is a well-known saying that claims that 80% of outcomes (or outputs) are due to 20% of all causes (or inputs) of a given event.

In business, one purpose of the 80-20 rule is to identify inputs that have the most potentialproductiveand make it a priority. For example, when managers identify factors that are critical to their company's success, they should pay most attention to those factors.

Although the 80-20 rule is often used in...business and economy, you can apply the concept to any field. The distribution of wealth, personal finances, spending habits, and even infidelity in personal relationships can all be subject to the 80-20 rule.

How does the 80-20 rule work?

You could see the 80-20 rule as simple cause and effect: 80% of the outputs come from 20% of the causes (inputs). The rule is often used to point out that 80% of a company's revenue is generated by 20% of its customers.

Viewed this way, it can be beneficial for a company to focus on the 20% of customers who are responsible for 80% of theincomeand specifically aimed at them. By doing this, the company can retain these customers and acquire new customers with similar characteristics. However, there is a more fundamental meaning to the 80-20 rule.

Core principles

At its core, the 80-20 rule is about identifying an entity's best assets and using them effectively to maximizevalue. For example, a student should try to identify which parts of a textbook will be most beneficial for an upcoming exam and focus on those first. However, this does not mean that the student should ignore the other parts of the textbook.

Wrong interpretations

People may not realize that the 80-20 rule is a rule of thumb, not a fixed mathematical law. Furthermore, it is not necessary that the percentages correspond to 100%.Entrances and exitsmerely represent different entities. The percentages of these units do not have to be 100%. It's the concept behind the rule that matters.

There is another way the 80-20 rule is misinterpreted. Namely that if 20% of the input is the most important, the other 80% should not be important. This is a logical fallacy. The 80% can be important even if you decide to prioritize the 20%.

80-20 rule background

The 80-20 rule is also known as the Pareto principle and is used in...Pareto analysis. It was first used in macroeconomics to describe the distribution of wealth in Italy at the beginning of the 20th century. It was introduced in 1906 by the Italian economist Vilfredo Pareto, who is best known for the conceptsPareto efficiency.

Pareto noted that 20% of the pods in his garden were responsible for 80% of the peas. Pareto extended this principle tomacro-economyby showing that 80% of the wealth in Italy was in the hands of 20% of the population.

In the 1940s, Dr. Joseph Juran, a prominent figure withinoperational management, applied the 80-20 rulequality controlfor commercial production.

He showed that 80% of product defects were due to 20% of problems in production methods. By focusing on and reducing the 20% of production problems, a company can increase the overall quality of its products. Juran called this phenomenon 'the vital few and the trivial many'.

Benefits of the 80-20 rule

While there is little scientific analysis proving or disproving the validity of the 80-20 rule, there is much anecdotal evidence supporting the rule as being essentially valid, if not numerically accurate.

Performance results for salespeople in a wide variety of companies have demonstrated success integrating the 80-20 rule. In addition, there are external advisors who useSigma-sexand other management strategies have incorporated the 80-20 principle into their practice with good results.

Example of the 80-20 rule

Carla, a Harvard graduate, was working on an assignment for her digital communications course. The project was to create a blog and track its success over the course of a semester.

Carla designed, created and launched the site. Halfway through the semester, the professor conducted an evaluation of the blogs. Carla's blog, while generating some visibility, generated the least amount of traffic compared to her classmates' blogs.

Define the problem

Carla came across an article about the 80-20 rule. That said, you can use this concept in any area. So Carla started thinking about how she could apply the 80-20 rule to her blogging project. She thought, "I've spent a lot of my time, technical skills, and writing expertise building this blog. Yet, despite all this energy expended, I'm getting very little traffic to the site."

She now understood that even if a piece of content is spectacular, it's worth next to nothing if no one reads it. Carla concluded that maybe she wasMarketing the blogwas a bigger problem than the blog itself.

Apply the 80-20 rule

To apply the 80-20 rule, Carla decided to reward her 80% of everything that went into creating the blog, including its content. Her 20% would be represented by a selection of the blog's visitors.

Usingweb analyses, Carla focused closely on the blog's traffic. She wondered:

• What sources make up the top 20% of traffic to my blog?
• Who is the top 20% of my target group that I want to reach?
• What characterizes this target group as a group?
• Can I afford to invest more money and effort in satisfying my top 20% of readers?
• Which blog posts make up the top 20% of my best performing topics in terms of content?
• Can I improve on these topics and gain even more control over my content than I am getting now?

Carla analyzed the answers to these questions and adjusted her blog accordingly:

1. She adjusted the blog's design and personality to appeal to her top 20% of audiences (a strategy common in blogs).micromarketing).
2. She rewrote some of the content to better meet the needs of her target audience.

Significantly, although Carla's analysis confirmed that the blog's main problem was marketing, she did not ignore its content. She remembered the common fallacy mentioned in the article – if 20% of the input is the most important, then the other 80% must be unimportant – and she didn't want to make that mistake. She knew that it was also necessary to address substantive aspects.

Results

By applying the 80-20 rule to her blogging project, Carla began to better understand her audience and therefore targeted her top 20% of readers more specifically. She reworked the blog's structure and content based on what she learned, and traffic to her site increased by more than 220%.