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
For example, a business may find that 80% of its sales come from 20% of its products and could focus on improving those products to boost sales further. Similarly, an individual may find that 80% of their productivity comes from 20% of their work tasks and could prioritize them to achieve better 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 the most productive way to apply the 80-20 rule? ›
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.
Where can the 80-20 rule be applied? ›
Although the 80-20 rule is frequently used in business and economics, you can apply the concept to any field. Wealth distribution, personal finance, spending habits, and even infidelity in personal relationships can all be the subject of the 80-20 rule.
What is an example of the 80-20 rule in marketing? ›
The 80/20 principle (aka the Pareto Principle) states that roughly 80% of the effects come from 20% of the causes. In other words, a smaller effort can result in a greater output. For example, in marketing, it could be that: 20% of a client's marketing channels generate 80% of the traffic.
What are 3 applications of the 80 20 principle to everyday life? ›
The List of Examples. 80% of a company's output is produced by 20% of its workers. 80% of social media shares are by 20% of posts. 80% of software glitches are caused by 20% of bugs.
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.
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.
How would you use the 80-20 rule at work or in your personal life? ›
Steps to apply the 80/20 Rule
- Identify all your daily/weekly tasks.
- Identify key tasks.
- What are the tasks that give you more return?
- Brainstorm how you can reduce or transfer the tasks that give you less return.
- Create a plan to do more that brings you more value.
- Use 80/20 to prioritize any project you're working on.
Break down your tasks into actionable steps and concentrate on the 20% of actions that will generate 80% of your desired outcomes. For example, if you're studying for an exam, identify the key concepts or topics that are likely to appear and allocate more time to mastering them.
Following are few example of Pareto principle in construction projects: 80% of the works problem are from 20% of the employees. 80% of long meeting outputs could be obtained in 20% of the time. 20% of your time creates 80% of your results.
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.
How do you visualize the 80-20 rule? ›
The Pareto chart is a visual representation of the 80-20 rule, featuring a bar + line chart. The bars represent the value of each item on your list (arranged in descending order), and the line indicates the cumulative percentage of those values.
How do you use 80-20 rule in a sentence? ›
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.
How can you implement 80 20 Pareto Principle to manage time explain with real life examples and practical tips? ›
How to Implement the 80/20 Rule in Your Life
- Step 1: List Your Tasks. Start by listing all the tasks you perform in a typical week. ...
- Step 2: Identify the 20% Next, identify the 20% of tasks that yield 80% of your desired outcomes. ...
- Step 3: Prioritise the 20% ...
- Step 4: Minimise or Outsource the 80%
The idea is pretty simple, of all your social media content, 80% of it should give value to your client and only 20% should ask for something from them. That might sound counterintuitive at first glance, but trust us, it works!
What is the 80 20 principle book example? ›
In the home, 20 percent of your carpets are likely to get 80 percent of the wear. Twenty percent of your clothes will be worn 80 percent of the time. And if you have an intruder alarm, 80 percent of the false alarms will be set off by 20 percent of the possible causes.
