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Understanding the Pareto principle

Last updated

7 February 2023

Reviewed by

Miroslav Damyanov

If you feel like most of your time at work is spent spinning your wheels, and the vast majority of your effective work comes in short spurts of productivity, you're probably right. You might feel better if you realize that's pretty typical.

You'll feel even better if you realize it's an observed phenomenon that's been researched and applied to practices for more than a century. What you're experiencing is called the Pareto Principle, also known as the Pareto Rule or the 80/20 Rule. 

What is the Pareto principle?

The Pareto Principle implies that 80 percent of consequences come from 20 percent of the causes, pointing to an unequal relationship between inputs and outputs. This principle illustrates that you probably are getting about 80 percent of your productivity from 20 percent of your time at work.

Referring to the concept as a principle would be more accurate than calling it a rule because it's not a hard and fast law. For instance, sometimes the observation might shift to a greater percentage of the output arising from 40 percent of the input.

Example of the Pareto principle

The Pareto principle has been observed over a broad range of topics over the years, not just productivity. For example, if you attend a meeting at work with 10 people, chances are that 80 percent of the speaking will be done by 2 of those in attendance. Or if you're in sales, 80 percent of your purchases likely will come from 20 percent of your customers.

Where does the Pareto principle come from?

The Pareto principle sprang from the studies of economist Vilfredo Pareto, who found that 80 percent of the property in his native Italy in the late 1800s was owned by 20 percent of the people. In studying this unequal distribution of wealth, Pareto tested his findings by studying other countries and found the numbers remained remarkably consistent. A century and a half later, not much has changed—current estimates are that 20 percent of the people in the world control 82.7 percent of the wealth.

Pareto also expanded his study to his garden, where he observed that 80 percent of the peas he harvested would be found in 20 percent of the pods.

Pareto did not coin the term Pareto principle, however. Psychologist Joseph Juran adopted the term Pareto principle when he applied observation while working with companies on operations management. Juran noted that 80 percent of production problems could be blamed on 20 percent of production methods. By having companies fix those methods making up 20 percent, they could increase production.

Juran developed methods for companies to focus on the "vital few" and ignore the "trivial many" to increase their chances of success.

Why is the Pareto principle important?

The Pareto principle has been found to be useful in a variety of fields, from management to agriculture to healthcare. When applying the Pareto principle to complex problems, it creates a starting point for action. This applies to both positive and negative issues.

For example, if a doctor realizes that 80 percent of patients with a specific disease will respond best to 20 percent of treatment options, the doctor will know to start with those treatment options to get the best outcomes more quickly. Then the doctor can move to other options for the 20 percent who don't respond.

On the other hand, if a software developer understands that 80 percent of her glitches are coming from 20 percent of her coding, she knows she needs to address those portions of the code.

How do we use the Pareto principle in everyday life?

The Pareto principle can be applied to many actions in our everyday life, such as increasing our productivity, improving our time management, and even building better relationships. For example, if you determine that 80 percent of your enjoyment or nurture comes from 20 percent of your friends, you're going to want to increase the amount of time you spend with those friends.

How to apply the 80-20 Rule

The Pareto principle can be applied in many ways, depending upon your circumstances and whether you are enhancing a positive issue or correcting a negative issue. The principle can be applied to personal or corporate issues with equal effectiveness.

Keeping Juran's concepts of the "vital few" and the "trivial many" in mind will also help as you apply the principle to your particular situation.

Applying the 80-20 Rule to your productivity

The "trivial many" probably plays the greatest role in how the Pareto principle can help you increase productivity, both on a personal and a corporate level. If 80 percent of your production comes from only 20 percent of your time, determining what the "trivial many" are that affect the other 80 percent of your time creates the opportunity to shift more time to productive tasks.

You also must understand what "trivial many" you control and what you don't. For example, having to answer the phone when your boss calls to ask a question would be something beyond your control. However, responding to a text message from your brother about next weekend's football game certainly is within your control of your time and attention.

Once you understand some counter-productive causes are out of your control, you can give yourself the grace to allow those interruptions to pass while you gain control of the trivial matters that you do control.

How do you use the Pareto principle in the workplace?

In a corporate setting, if you understand that 20 percent of your team accomplishes 80 percent of your productivity, you should make sure your most important tasks are assigned to those 20 percent while also addressing what issues might be keeping the 80 percent from accomplishing more. 

Some of those issues will be beyond your control—like maybe a team member just doesn't have the intelligence to handle higher-level tasks but performs lower-level tasks that would distract your more productive team members. Other issues may be within your control, such as less productive team members requiring more training or better equipment.

Applying the 80-20 Rule to your products and services

When 20 percent of your products or services are generating 80 percent of your profits, you need to understand why. This will allow you to focus on either creating more products or services like the profitable 20 percent or determining if you can improve other products and services to increase their contribution to your profits. 

For example, if you own a restaurant and have 40 items on your menu, it’s likely that 8 of those items generate the bulk of your profit. The decision becomes whether to create more menu items like those or pare out the items that are not generating profit.

Applying Pareto's principle to marketing

In marketing, the Pareto principle would tell you that 80 percent of your leads are going to come from 20 percent of your strategies. This points to the importance of testing your marketing efforts to know which 20 percent is effective. While you may not want to throw out the 80 percent that is less effective, you certainly will understand the need to modify those efforts to become more successful. 

Pareto principle in time management

When you consider how the Pareto Principle applies to productivity, you also can understand how to use it in time management. If 80 percent of your productivity comes from 20 percent of your time, you understand that 80 percent of your time is devoted to less productive tasks. In applying the Pareto principle, you can create a to-do list and prioritize it so that you are focusing on your most productive tasks, rather than just knocking off the easiest tasks first.

Pareto principle in investing

If a group of investment advisors finds that 80 percent of its profits come from 20 percent of its investors, the company can use the information to adopt a few strategies to improve its bottom line:

  1. Focus more attention on those investors: Ignoring the other 80 percent of your portfolio would not be wise, but spending less time with those clients, along with analyzing and managing their accounts, could leave more time for attention on the higher-performers' accounts.

  2. Determine if existing clients can be scaled up: Investment advisors can look at those 80 percent and see if any of them might be able to scale up. For example, they could be convinced to take more aggressive positions or could move investments from other brokerages to their firm.

  3. Look for more investors like your 20 percent: Once a company knows the demographics and the portfolio size of their best investors, they can focus on finding more clients like those through their marketing efforts.

How to create a Pareto chart

To create a Pareto chart, you need to gather good data on the issue you are measuring. This means including each contributor to the issue and determining the measure, ensuring you are using the same measure throughout. Examples of factors could be cost, time, number of errors, etc.

You should be specific in gathering all the contributors, as you don't want to end up with "miscellaneous" becoming one of the "vital few" because you lumped too many contributors into a vague category. For example, if you're looking to see what causes your app to crash, you may find 20 contributors in the coding that cause crashes. The Pareto principle will tell you that 4 of those contributors are causing 80 percent of your crashes, so it's important to pinpoint each of the 20 contributors.

Advantages of the Pareto principle

The Pareto Principle can be an effective tool, particularly in business when it comes to productivity and time management. Companies can identify their most productive employees and make sure they are assigned to the most important tasks or clients.

Leaders can also make sure their teams are focused on the more important tasks while still fulfilling the demands of other tasks. This allows leaders to learn what is most effective in their leadership style and apply that knowledge or make changes in what they do to increase productivity.

Companies also will discover their most profitable products and services and learn to focus more energy on those, and/or create more products and services with the same likelihood of success.

Disadvantages of the Pareto principle

You should understand that the Pareto Principle is not a law and sometimes the numbers will vary from 80/20. For instance, sometimes it may be 30 percent of your products that generate the highest percent of your profit. 

The Pareto principle also only applies to data from the past and cannot specifically predict the future. Other factors will enter into the equation to change the contributors that can be controlled, and some contributors also will remain outside your control.

Focusing too much on the 20 percent also could create problems if the 80 percent is ignored. For example, the brokerage company we looked at earlier would not want to drop 80 percent of their clients to focus on the 20 percent. That could be fiduciary malpractice but also would be harmful if some of the remaining 20 percent suddenly decided to find a different broker.

The lowdown

The Pareto principle essentially explains the imbalance between input and output. Though the Pareto principle is not a set or predictable rule, it does have applications in many areas that can allow for better time management and attention focus.

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