Understanding the Pareto Principle (The 80/20 Rule)

Blog Articles
21

@Deb: Thanks, glad you found it useful :).

@Anonymous: You’re right, for items which are uniformly distributed (everyone working the same job in the same company, machines in the same factory, etc.) then the 80/20 rule may not apply.

It’s more of an observation (not law) that many things in life are not uniform – there are hot spots and cold spots, high performers and low. The 80/20 rule is a rough estimate about how much of an effect the “critical” 20% has in situations where everything is not the same.

22

[…] Yup, the old 80/20 rule. Also known as the Pareto principle, which states that for many events, 80% of the effects come from 20% of the causes. Just like in business, 80% of the sales persons comes from 20% of the clients. Well, in my portfolio, 80% of my growth will come from 20% of the assets. […]

23

[…] The Pareto Principle is not without criticism, and one shouldn’t be too concerned about whether anything actually perfectly meets the 80-20 parameters. It might be 70-30, or 90-10, or 95-5, or whatever. The point is that as a model it helps one to focus on probable cause and effect. If we can eliminate just 20% of the clutter in our lives, we could see a significant improvement, potentially in everything. […]

24

[…] Understanding the Pareto Principle (The 80/20 Rule) at BetterExplained Categories: Personal development Tags: Change, MyFav […]

25

[…] Whether making estimates or writing software, perhaps you can start with a rough version and improve it over time, without fretting about the perfect model (it worked for Archimedes!). Most of the accuracy may come from the initial stages, and future refinements may be a lot of work for little gain (the Pareto Principle in action). […]

26

Hi,

This is a very informative article. I do research on equities. It has helped me in analyzing my portfolio. 80% of my portfolio’s return is from my 20% of top stocks. I think this prove the theory. But it doesn’t mean that those 20% of stocks which were/are yielding me 80% of profit will remain constant. We need to constantly keep analyzing which are the top performing stock and major contributors to my return.

Thanks for this article. Hope to read more on this, and many others.

27

Thanks Vishal! Yes, many things in life have an 80/20 distribution. But as you say, which 20% can change over time – nice observation!

Thanks for the comment.

28

Truth is …all i wanted was to u/stand 80/20 princple which gets mentioned frequently at the office. Thanks to you and your simple anology of the 5 steps of “creating” a car. By the way i just thought of spending a few minutes of my time - kind of summary reading" on Pareto, yet ended up spending an hour. In many ways my actions and understanding can be equated to 80/20 principle. I spend 20 minutes of my time going over your theory along with the rest of your comments who frequent your site AND I ended up being 80% more aware of Pareto Principle.

In short… many thanks and God Bless

29

[…] read the rest of the article […]

30

[…] As I wrote in a previous mindless meandering, management-by-walking-around is a key trait for successful managers. The key learning out of this in tough times is YOUR VISIBILITY to others. It’s important that remaining unflappable and resolute by being accessible helps immensely. If there’s nothing one can do during these times, using the 80-20 rule, do this one thing. Classic example of this kind of leadership is illustrated by Thomas “Stonewall” Jackson - a classic model of outstanding leadership. […]

31

[…] It’s that time of year when relatives are starting to buy all kinds of ill-advised presents for loved ones and books always feature fairly high on the list of such items.  Obviously, given the laws of supply and demand and all that, there are loads of new books hitting the shelves at the moment but, with an eye on the Pareto principle, one could be forgiven for concluding that most of them are worth avoiding. […]

32

[…] (*Never heard of the 80-20 “rule”? I hadn’t either till a couple months ago. Here is a good, non-hyped explanation.) […]

33

Thanks for your explanation, it’s the best I’ve found after just discovering the so-called “Pareto Principle”.

However, I really think everyone’s making a big deal out of nothing.

Principle?

So, some guy discovers that 80% of the wealth is held by 20% of the population. Okay, that’s nice. I guess before that no one knew that there are less rich people than poor people. Or maybe they just didn’t have a nice set of percentages to work with - in any case, the information interesting, but is not all that useful unless you’re trying to start a revolution or something.

Then, later on, someone notices that something else has an 80/20 relationship and we decide this 80/20 thing must be a law of nature?

Of course, in any system, there will be interesting relationships to be discovered. But now, every time that relationship is discovered to be 80/20 someone’s bound to pipe up with “Aha! It’s another example of the Pareto Principle!”.

Since this is the case and people have an easier time remembering things when they have a name to invoke, I would like to proclaim here and now that I have discovered that many things do NOT exhibit an 80/20 relationship and I call this the “Marty Principle”.

The way I see it is: we human beings like to put things in neat little boxes of sameness - and that’s all that’s happened here.

Usefulness?

This principle isn’t something anyone should use for managing or deciding how many bugs should be fixed - what people should use is common sense. If someone is goofing off all the time, fire them. If the last 20% of bugs aren’t critical and don’t cause any data loss - maybe the product can ship with the known issues.

If you think you can get away with (or even want to try) only giving 20% of your employees raises or providing support to only 20% of your customers, you probably shouldn’t be in business. Or. what if you stopped work on a building when it’s 20% complete (since you figure 80% of the traffic will only be using the Starbucks on the first floor)?

You can’t use this principle to your advantage like this. You have to complete work and support your entire customer or employee base. If you then notice that there’s an 80/20 relationship in there somewhere, so what? Nice to know, but not very useful.

Sorry, didn’t mean to write a book. In any case, thanks again for your explanation. You should consider adding it to Wikipedia (or at least helping to rewrite what they currently have).

Cheers!

34

[…] 80% of your best business comes from 20% of your clients, network, and efforts. Conversely 80% of our time is spent creating 20% of our results. The Pareto Principle clearly illustrates the basic truth that not all efforts produce equal effect. What am I changing? I plan to launch 2009 focusing on the highest payoff activities, clients, and network to make best use of time and energy. […]

35

I agree with Marty. 80/20 is an observation and it’s usefulness as a management or planing tool is at the best questionable. I wonder how many people would feel comfortable to fly with the airline which announced that it has fixed 20% of the problems with their aircrafts because those 20% caused 80% of the crashlandings. Good luck for them to find willing passengers. It is a poor excuse to use the 80/20 principle not to do things right.

36

[…] 80% of your best business comes from 20% of your clients, network, and efforts. Conversely 80% of our time is spent creating 20% of our results. The Pareto Principle clearly illustrates the basic truth that not all efforts produce equal effect. What am I changing? I plan to launch 2009 focusing on the highest payoff activities, clients, and network to make best use of time and energy. […]

37

[…] The Pareto Principle or 80/20 rule, illustrates the importance of using the small amount of discretionary time available to maximize results. The majority of our time use goes toward maintenance, work duties, and repeating tasks. That’s why it’s so important to use the small percentage of remaining time effectively. […]

38

Marty, I just came across this site and read your comment. I understand what you are saying, however, a lot of companies are already just giving rewards to the employess that are performing more than others. A lot of us know these as “performace bonuses.” After companies review their financial, they set goals to be met by their sales, service, parts, etc… and reward them with cash for a a job well done. Some companies do fire employees that do not make their bonus more than two/three consecutive times in a row.

A lot of retailers reward their main customers all the time. When you go to a store and they have those cards that state, free meal after 8th visit, or free hair cut after 10th visit, etc… You may not use them, but you will be surprise how many of their loyal customers take advantage of those discounts. The stores know that they can’t just offer a discount to just the 20% that bring them 80% of their income, so they offer it to everyone, but it is usually the 20% that just take advantage of it.

I agree with you that people like things packaged and handed to them on a platter, but this is a great principle to help someone realize that nothing in life is 50%/50%. Oh, as for the 20% of the people that brings you income, I don’t think that he meant ignore the 80% percent. He was just stating, that most people would focus on getting that 80% and forget about the 20% that was bringing in the main money. I believe he was mentioning to keep in mind of your 20% and work on adding some of your 80% to your 20%.

Thanks,

Eric

39

[…]  80% of your best business comes from 20% of your clients, network, and efforts. Conversely 80% of our time is spent creating 20% of our results. The Pareto Principle clearly illustrates the basic truth that not all efforts produce equal effect. What am I changing? I plan to launch 2009 focusing on the highest payoff activities, clients, and network to make best use of time and energy. […]

40

[…] Since Juran’s coining of the term, the Pareto principle has come to mean in business that 80% of one’s sales or conversions come from 20% of the population. Or more plainly, approximately 2% of leads turn into conversions, or 2 in 10 stock investments result in real profit. A common mistake in business and other applications of the 80-20 rule is getting caught up in the numbers and summation to 100% of the rule. Instead, take a step back and look at the Pareto principle at a higher level of granularity with the primary point being that most things do not follow an even distribution! How to Apply the Pareto Principle in Your Life […]