The Pareto Principle

Vilfredo Pareto (1848-1923) was an Italian economist who established what is now known as the Pareto Principle, or the 80/20 Rule. In 1906, Pareto observed that 80% of the land in Italy was owned by 20% of the population. Later, he discovered that the Pareto Principle was valid in other parts of his life. While gardening, for example, Pareto observed that 80% of the peas in his garden were produced by 20% of the peapods. 

The exact values of 80% and 20% are not important. What is important to understand is the imbalance. In any situation, there  are usually a few factors whose influence far surpasses the importance of the other factors. The effect of this imbalance is that a substantial percent of the results of a given process or system can be attributed to a much smaller percentage of all the possible causes. 

So how does this statistical principle apply to us? The Pareto Principle is present in many aspects of our lives, both personally, and in the workplace. By becoming more aware of its presence, we can use the 80/20 Rule as an analytical tool to increase effectiveness and productivity.  

Here are a few ways to practically apply the 80/20 Rule in your business: 

Business profitability. According to the Pareto Principle, 80% of a company’s profits are generated by 20% of its customers. By identifying and ranking customers in order of profitability, you can then focus your sales efforts on these vital few customers. 

Salespeople. About 80% of a company’s revenue will be generated by the top 20% of its salespeople. This information is quite helpful in determining compensation, and also in determining the focus of sales management. 

Advertising. Approximately 80% of the results of an ad campaign will be produced by 20% of the advertising. By focusing on the effectiveness of ads, a great deal of advertising could be eliminated, and those funds committed to the advertising that is producing the desired results. 

The 80/20 Rule can be applied to your personal life, as well: 

Personal Productivity. 80% of your time is currently spent on trivial activities. What are the 20% of your activities that are producing 80% of your results? Focus only on these activities, and either discontinue or delegate all other activities. 

Happiness. What are the 20% of your activities that provide 80% of your pleasure? Whatever your answer, strive to increase the frequency of these activities. 

Relationships. What activities create the most desired results in your relationships? Once you identify these activities, shift your focus so that you are concentrating on these vital few activities. 

Health. 80% of your health is produced by 20% of the foods you’re eating. Try to consume more vegetables, for example, and less fats and sugars. 

The 80/20 Rule can be applied to many areas of your life. What other examples of the Pareto Principle are showing up for you? By noticing the applications of this principle, then acting on such observations, you will enhance the results you produce at work, and in your personal life.