The 80-20 rule, also known as the Pareto Principle, states that 80% of all outcomes result from 20% of all causes. In business, this means seeking the most productive inputs that will generate the highest outcomes/returns. There are a number of practical applications for the 80-20 rule in diverse areas such as the distribution of wealth in economics, quality production control, business sales, and growth.
Key Takeaways
- The 80-20 rule, also known as the Pareto Principle, states that 80% of all outcomes (output) derive from 20% of all causes (inputs).
- The Pareto Principle was created by economist Vilfredo Pareto in Italy in 1906.
- The rule has far-reaching applications, including in quality production, the distribution of wealth, business, investing, and project management.
- In business, the principle asserts that 80% of a company's revenues should come from 20% of its customers.
Origins of the Pareto Principle
The 80-20 rule was invented by Vilfredo Pareto in Italy in 1906. According to legend,Pareto, an economist, noticed20% of the pea pods in his garden provided80% of the peas. He then determined20% of the population in Italy owned 80% of the land. The use of the80-20 rulehas since expanded beyond the alleged humble beginnings in Pareto’s garden.
Dr. Joseph Juran applied the 80-20 rule to quality control in the 1940s. He found that 80% of problems with products were caused by 20% of the production defects. By focusing on and reducing that20% of production defects, overall quality could be increased. Juran became an important figure in Japan after lecturing there extensively on quality control issues. His main phrase was, "thevital few andthe trivial many."
Managers at companies should identify the factors that are the most important to the company's success and give those factors the most attention.
The 80-20 Rule in Business and Investments
The 80-20 rule has found applications in business management. For business sales, 20% of a company’s repeat customers should be responsible for 80% of the sales. Also, 20% of the employees are responsible for 80% of the results.
For project management, the first 20% of the effort put in on a project should yield 80% of the project’s results. Thus, the 80-20 rule can help managers and business owners focus 80% of their time on the 20% of the business yieldingthe greatest results.
In investing, the80-20 rulegenerally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio’s growth. On the flip side, 20% of a portfolio’s holdings could be responsible for 80% of itslosses.
Another method is to attempt to focus a portfolio on the 20% of stocks in the broader market that comprises 80% of the market’s returns; however, due to the uncertainty of future returns, both of these methods are difficult to put into practice. Stocks are inherentlyrisky assetsdue to the unpredictability of future performance.
One method for using the80-20rule in portfolio construction is to place 80% of the portfolio assets in a lessvolatileinvestment, such as Treasury bonds or index funds while placing the other 20% in growth stocks. The 80% in the lower-risk investment will collect a reasonable return, while the 20% in the higher-risk assets will hopefully achieve greater growth.
What Is an Example of the 80-20 Rule?
An example of the 80-20 rule is 80% of a company's revenues coming from 20% of its customers or 20% of a portfolio's most risky assets generating 80% of its returns.
How Do You Set Goals With the 80-20 Rule?
To set goals with the 80-20 rule, you primarily establish that 20% of your efforts/tasks will result in 80% of your results. For example, at work, 20% of the effort you put into your job will result in 80% of your tasks being completed/successful.
What Is the 80-20 Rule for CEOs?
CEOs can use the 80-20 rule by determining the 20% of tasks that need to be prioritized and done themself while delegating 80% of the tasks to their subordinates. This allows a CEO to effectively manage their responsibilities and be productive.
The Bottom Line
The 80-20 rule (Pareto Principle) has many applications that allow companies and investors to make the most efficient decisions. For example, a company would look to 20% of its customers generating 80% of its revenues. The same thought process can be applied to risk and reward in an investment portfolio. Overall, the application of the 80-20 rule helps to maximize efficiency.
FAQs
20% of drivers cause 80% of all traffic accidents. 80% of pollution originates from 20% of all factories. 20% of a companies products represent 80% of sales. 20% of employees are responsible for 80% of the results.
What is the 80 20 rule with practical examples? ›
The 80/20 rule is not a formal mathematical equation, but more a generalized phenomenon that can be observed in economics, business, time management, and even sports. General examples of the Pareto principle: 20% of a plant contains 80% of the fruit. 80% of a company's profits come from 20% of customers.
What is a practical example of the Pareto Principle? ›
Example of the Pareto Principle
If an advisory practice has 100 clients, according to the Pareto Principle, 80% of the financial advisor's revenue should come from the top 20 clients. These 20 clients have the highest amount of assets and the highest fees charged.
What is an example of the Pareto Principle 80 20 rule found in the world? ›
Pareto noticed that 20% of the pea pods in his garden were responsible for 80% of the peas. Pareto expanded this principle to macroeconomics by showing that 80% of the wealth in Italy was owned by 20% of the population.
What is a real life example of Pareto analysis? ›
Here are some real world examples of the Pareto Principle you might find interesting: A 2002 report from Microsoft found that “80 percent of the errors and crashes in Windows and Office are caused by 20 percent of the entire pool of bugs detected.” 20% of the world's population controls 82.7% of the world's income.
What is an example of the 80-20 rule in fitness? ›
In order to see results at the gym, lose weight or even maintain overall health, we're told that it's an 80/20 balance. Meaning 80% of your results comes from the food you eat, and only 20% of your results come from your workouts.
What is an example of the 80-20 rule in marketing? ›
Here are some examples you may have already experienced in your business: 80% of your sales volume is generated by 20% of your customers. 80% of your revenues are generated by 20% of your products. 80% of your complaints come from 20% of your customers.
What is an example of Pareto method? ›
The Pareto Principle illustrates the lack of symmetry that often occurs between the work you put in and the results you achieve. For example, you might find that 13 percent of work could generate 87 percent of returns.
How can you implement 80 20 Pareto Principle to manage time? ›
Here are two quick tips to develop 80/20 thinking:
- Take a good look at the people around you. Twenty percent of your colleagues, staff and patients probably give you 80 percent of the support and satisfaction you need. ...
- Examine your work. ...
- Read less. ...
- Keep current. ...
- Remember the basics.
Love and the 80/20 rule
For instance, you can expect to get 80% of your needs met by your partner in your relationship, but the other 20% is up to you. In another context, you can expect satisfaction from your relationship 80% of the time, while the other 20%, not so much.
Prioritize the first 20% of your workday regarding the tasks you complete and know when it's time to pivot and make changes when working on the remaining 80% to ensure you don't waste too much productive time and energy.
What is the 80/20 rule in the workplace? ›
The 80/20 Principle: 20% of Employees Shoulder 80% of the Work. The Pareto Principle suggests that a small minority of employees is responsible for the majority of an organization's productivity. These 20% are the floor leaders – the ones who know what to do and simply take care of things.
What is an example of 80 20 thinking? ›
20% of products represent 80% of the revenues of many businesses. 20% of customers account for 80% of the profits of many businesses. 20% of criminals account for 80% of criminal losses. 20% of motorists cause 80% of the accidents.
What is the 80-20 rule for dummies? ›
This rule suggests that 80% of effects come from 20% of causes. For example, 80% of a company's revenue may come from 20% of its customers, or 80% of a person's productivity may come from 20% of their work. This principle can be applied to many areas, including productivity for small business owners.
What is the 80 20 principle using clear work related examples? ›
Extrapolating this concept, Pareto defined a rule that became known as the Pareto 80 20 rule, which could be summarized as follows: 80% of results are produced by 20% of causes. So, here are some Pareto 80 20 rule examples: 20% of criminals commit 80% of crimes.
What is the 80-20 in real life? ›
The 80/20 Principle has historically been most popular in business management situations. Businesses often found that roughly 20% of their customers brought in 80% of their sales. They found that about 20% of their sales reps closed 80% of the sales. They found that 20% of your costs led to 80% of their expenses.
How do you apply 80-20 rule in learning? ›
Simply put, 20% or less of the studying you are doing is leading to the majority of your results. Furthermore, 20% or less of your course content comprises the majority of the content on your exams. Remember, professors (whether they know it or not) are applying the 80-20 rule to their exams.
