The 80-20 rule, also known as the Pareto law, is a maxim that asserts that 80% of the effect (or output) occurs in 20% of all causes (or inputs) to a given event. One goal of the 80-20 rule in business is to identify and prioritize the potentially most productive inputs. For example, once managers have identified the factors that are critical to business success, those factors should be the most focused.
The 80-20 axiom is widely used in business, but the concept can be applied to any area, such as wealth distribution, personal finances, spending habits, and even denial of interpersonal relationships.
look at a glance
— The 80-20 rule says that 80% of the effect (output) can be traced back to 20% of the cause (input).
— The 80-20 rule prioritizes 20% of the elements with the best results.
— The principle of the 80-20 rule is to identify a company’s best assets and use them efficiently to create maximum value.
— These “rules” are commandments, not rigid mathematical laws.
Realizing the 80-20 Rule
The 80-20 rule can be thought of as a simple cause and effect. 80% of the effect (output) comes from 20% of the cause (input). This rule is often used to indicate that 80% of a company’s revenue comes from 20% of its customers. Viewed this way, it can be advantageous for a company to focus on the 20% of customers who account for 80% of its sales and to market them specifically.
The key to the 80-20 rule is to identify your company’s best assets and use them efficiently to create maximum value. For example, a student should determine which part of a textbook will be most useful for an upcoming exam and focus on that part first. However, this does not mean that students should ignore other parts of the textbook.
The 80-20 rule is a commandment, not a constant mathematical rule. In general, 80% and 20% being 100% is a coincidence. Input and output do not have to be 100% percentages as input and output simply represent different units.
The 80-20 rule is often misinterpreted. Sometimes misunderstandings are the result of logical errors. In other words, if 20% of the input is the most important, the remaining 80% may not be important. In other cases, confusion arises from random 100% sums.
80-20 Rule Background
The 80-20 rule, also known as the Pareto principle and applied to Pareto analysis, was used in macroeconomics in the early 20th century to explain the distribution of wealth in Italy. The concept of Pareto efficiency was introduced in 1906 by Italian economist Vilfredo Pareto, best known for his concept of efficiency.
Pareto found that 20% of the pea pods in his own garden make up 80% of the peas. Pareto extended this principle to macroeconomics by showing that 80% of Italy’s wealth belongs to 20% of the population.
In the 1940s, Dr. Joseph Juran, a renowned operations management expert, applies the 80-20 rule to quality control for corporate production. 80% of product failures are due to 20% of manufacturing problems. By focusing and reducing 20% of production problems, the company has been able to improve overall quality. Juran called this phenomenon “a significant minority and a minor majority.”
Benefits of the 80-20 Rule
While there is little scientific analysis that can prove or disprove the validity of the 80-20 rule, there is plenty of anecdotal evidence that the rule is intrinsically valid, even if not numerically accurate.
The performance results of salespeople at various companies have proven successful by incorporating the 80-20 rule. In addition, external consultants using Six Sigma and other management strategies have achieved good results by incorporating the 80-20 Principles into their practice.
Real-World Example of the 80-20 Rule
Carla, a Harvard student, was working on a digital communications course assignment. The project consisted of creating a blog and monitoring its success over a semester. Carla designed, built and launched the website. In the middle of the semester, the professor did a blog evaluation. Carla’s blog gained some visibility, but had the least traffic compared to her classmate’s blog.
When to Apply the 80-20 Rule
Carla found an article about the 80-20 rule. After she said she could use this concept in any realm, she started thinking about how Carla could apply the 80-20 rule to her blog project. She
thought I had put a lot of time, skills and writing skills into building this blog. However, despite all this energy consumed, the site generates very little traffic.
She knew that no matter how good something it was, it was practically worthless if no one read it. Carla concluded that blogging may be a bigger problem than the blog itself.
To enforce the 80-20 rule, Carla decided to use her “80%” of everything that goes into creating a blog, including content. Her “20%” was the number of blog visitors.
Carla used web analytics to precisely focus her blog’s traffic. She asked:
— What sources make up the top 20% of my blog traffic?
— Who are the 20% of your target audience you want to reach?
— What characterizes this audience as a group?
— Can you invest more money and effort to satisfy your top 20% readers?
— Which blog posts make the top 20% of the top performing topics in terms of content?
— Can I improve this topic and get more attention from my content than it is now?
Carla analyzed these questions and edited the blog accordingly.
— She tailored the design and personality of her blog to match the design and personality of her top 20% target audience, a common strategy in micromarketing.
— She has rewritten some content to better meet the needs of her target audience.
Her analysis confirmed that the blog’s biggest problem was marketing, but Carla didn’t ignore it. She remembered a common error quoted in her article. If 20% of the input is the most important, then the remaining 80% should be insignificant. And I didn’t want to make that mistake.
Carla applied the 80-20 rule to her blog project to better understand her audience and better target her top 20% readers. Based on her findings, she modified the structure and content of her blog and increased website traffic by more than 220%.