Pareto's 80-20 Rule Theory
What is Pareto's 80-20 Rule?
The Pareto Principle or '80-20 Rule' (among other variant names) is surely one of the simplest and most powerful management tools on the planet.
- It's a remarkably quick easy way to assess, understand and optimise virtually any situation involving the distribution or usage of some kind.
- The potential uses, therefore, cover most aspects of work, business, organisational development and personal life.
Background Information and Terminology
Pareto's Principle is named after Vilfredo Pareto (1848-1923), an Italian economist-sociologist, Professor of Political Economy at Lausanne, Switzerland, who first discovered and described the '80:20' effect.
The Pareto Principle is known by many different names, including:
- The Pareto Law
- Pareto's Law
- Pareto Theory
- The 80-20 Rule (or 80/20 Rule, or 80:20 Rule, or 80 20 Rule)
- The 80-20 Principle, (or 80/20 Principle, or 80:20 Principle, or 80 20 Principle)
- Pareto's 80-20 Rule (and variations of this)
- The Principle of Imbalance,
- The Principle of Least Effort (a term coined by George Zipf in 1949 based on Pareto's theory)
- The Rule of the Vital Few (an interpretation developed by Joseph Juran in the field of quality management)
- and many other variations/combinations of these expressions.
There is no 'correct' version. Popular usage (and indicated by Google) tends to prefer:
- Pareto Rule
- The 80-20 Rule, and
- Pareto's 80-20 Rule.
Technically '80:20' is most correct numerical presentation of the rule because this is the usual format for expressing a ratio in mathematics, although not even a statistical purist would insist on this in a Pareto context.
You may notice that lots of variations of the Pareto Rule name are used in this article, mainly to illustrate the variability of the term, and also to enable web searching (where every version imaginable is used) in finding this content.
The 80-20 Rule Practical Application
The Pareto 80/20 Rule is commonly used (and also ignored at considerable cost) in many aspects of organisational and business management.
- It is helpful in specialised quality management such as six sigma, planning, decision-making and general performance management.
- Pareto theory is also an extremely helpful reference or 'check' in business/organisational planning and project management too.
Leadership is a lot easier and more effective when Pareto principles are kept in mind and this applies to every form of leadership theory and approach.
The Pareto principle is extremely helpful in bringing swift and easy clarity to complex situations and problems, especially when deciding where to focus effort and resources.
Pareto's Law is dramatically effective when applied to selling and marketing situations - because it encourages a focus on activity and energy that usually produces very fast and substantial improvements
- For example, when applied to target audiences, existing customers, product ranges, pricing, etc. and other major 'profit levers'. Really, it's impossible to overstate the effectiveness of the theory in these areas, despite which the use of Pareto theory in sales and marketing is commonly overlooked completely.
Pareto's 80-20 theory extends particularly to time management - in work, business, organisational management and certainly personal time management outside of work too.
The Pareto Principle (at a simple level) suggests that where two related data sets or groups exist (typically cause and effect, or input and output), for example:
- "80 percent of output is produced by 20 percent of input"
- "80 percent of outcomes are from 20 percent of causes"
- "80 percent of contribution comes from 20 percent of the potential contribution available"
There is no single definitive Pareto 'quote' or definition - the above are examples of simple interpretations of Pareto's 80-20 Rule, for which a very wide range of similar alternatives could be used instead, depending on the situation, including inversions, for example:
- "20 percent of clothes in a wardrobe are worn 80 percent of the time"
- "20 percent of the tools in a toolbox are used in 80 percent of tasks"
- "20 percent of the energy use in a household will offer 80% of the potential energy savings"
The Pareto Principle is an extremely useful model or theory with endless applications - in management, social study and demographics, all types of distribution analysis, business and financial planning and evaluation, and also for organizing your work and life.
- For example, household energy savings can be dramatic and easy if you identify the 20% of energy use which offers 80% of the potential savings available.
- Just as DIY can be made more efficient if the 20% of tools that are used for 80% of tasks are organised to be the most accessible in the toolbox or 20% of clothes worn 80% of the time are organised to be most accessible in the wardrobe...
In fact, the Pareto Principle does not demand that the 80:20 ratio applies to every situation, and neither is the model based on a ratio in which the two figures must add up to 100.
Pareto Rule Examples
The examples used here are not statistical facts; the 80-20 ratio is used to show that the Pareto distribution principle can be applied to many different situations.
- Often the optimal ratio (in terms of identifying the smallest proportion that will produce the greatest improvement) is closer to 90:10, or even 99:1. Also, the numbers in the ratio do not have to add up to 100. The two numbers in an optimal ratio may total more than 100 or less than 100.
For example, a situation can exist where 99% of the result is produced by 15% of the factors, or where 75% of the results derive from 5% of the factors.
So even where a situation does contain an 80:20 correlation, other ratios might be more significant, for example:
- 99:22 (illustrating that even greater concentration than 80:20 and therefore significance at the 'top-end') or
- 5:50 (i.e., just 5% results or benefit coming from 50% of the input or causes or contributors, obviously indicating an enormous amount of ineffectual activity or content).
The reasons that 80:20 has become the 'standard' ratio associated with the effect are:
- The 80-20 correlation was the first to be discovered and published
- 80-20 remains the most striking and commonly occurring ratio
- and since its discovery, the 80:20 ratio has always been used as the name and basic illustration of the Pareto theory.
Here are some examples of Pareto's Law as it applies to various situations. According to the Pareto Principle, it will generally be the case (broadly - remember it's a guide, not a scientific certainty), that within any given scenario or system or organisation:
- 80 percent of results come from 20 percent of efforts
- 80 percent of activity will require 20 percent of resources
- 80 percent of usage is by 20 percent of users
- 80 percent of the difficulty in achieving something lies in 20 percent of the challenge
- 80 percent of revenue comes from 20 percent of customers
- 80 percent of problems come from 20 percent of causes
- 80 percent of profit comes from 20 percent of the product range
- 80 percent of complaints come from 20 percent of customers
- 80 percent of sales will come from 20 percent of sales people
- 80 percent of corporate pollution comes from 20 percent of corporations
- 80 percent of work absence is due to 20 percent of staff
- 80 percent of road traffic accidents are cause by 20 percent of drivers
- 80 percent of a restaurant's turnover comes from 20 percent of its menu
- 80 percent of your time spent on this website will be spent on 20 percent of this website
- and so on..
Remember for any particular situation the precise ratio can and probably will be different to 80:20, but the principle will apply nevertheless, and in many cases, the actual ratio will not be far away from the 80:20 general rule.
Such a principle is extremely useful in planning, analysis, troubleshooting, problem-solving and decision-making, and change management, especially when broad initial judgments have to be made, and especially when propositions need checking.
- Many complex business disasters could easily have been averted if the instigators had thought to refer to the Pareto Principle as a 'sanity check' early on. Pareto's Law is a tremendously powerful model, all the more effective because it's so simple and easy.
Another example would be, consider an organisation which persists in directing its activities equally across its entire product range when perhaps 95% of its profits derive from just 10% of the products, and/or perhaps a mere 2% of its profits come from 60% of its product range. Imagine the wasted effort.
- Instead, by carrying out a quick simple 'Pareto analysis' and discovering these statistics, the decision-makers could see at a glance clearly where to direct their efforts, and probably too could see a whole lot of products that could be discontinued.
- The same effect can be seen in markets, services, product content, resources, etc; indeed any situation where an 'output: input' or 'effect: cause' relationship exists.
Different Ways of Using the Pareto Principle
There is no fixed process or method for using the Pareto theory.
Here are some examples of different areas and ways to use it. There are very many more.
1. Sales/Selling example
- Sales-people and selling organisations usually approach potential customers with different offerings. These offerings probably have different rates of success. But typically sellers do not understand these variances and may use the different offerings in an arbitrary or random or instinctive way, when Pareto theory suggests that the use of these offerings can be optimized according to which offering produces the best results.
- In this scenario, it is highly likely that 80% of your new customers result from 20% of your offerings (it may not be exactly 80-20; it might be 70-20, or 90-15, or a similar big-small ratio).
Therefore, sellers will improve their results if they:
- Identify which offering(s) produces most new customers, and
- Then use the identified most-effective offerings more often (and use the less-effective offerings less often, or not at all).
Of course, to do the necessary analysis the seller must record the offering which each new customer responded to (which sellers should arguably be doing anyway).
2. Major accounts selling example
Most selling organisations have a few large customers which represent a disproportionately large percentage of total sales.
- Likelihood: 80% of your sales revenues probably come from 20% of your customers (often this is even more of an extreme ratio, like 90-10 or 90-5).
It is important to understand this for several reasons:
- The more extreme the ratio, then the more at risk the overall business is.
- Where such a situation exists it is important to realise this - so as to protect the major customer(s), and to work towards altering the ratio by gaining new customers so that the business dependence on one or a very few customers is reduced
- The expression "having all your eggs in one basket" refers to the risk of dropping that one vital basket and losing all your eggs - which in this case alludes to losing a very big major customer which represents a vast amount of business and jeopardizing the entire organization.
- Every business needs to take extra special care of its major customers, especially when the 'Pareto ratio' is extreme and organisational viability and survival rely on just one or very few large customers.
3. Streamlining, downsizing, rationalising, decluttering anything - reducing range, commitments, materials, 'stuff', etc.
Most organisations and personal lives contain a far greater range of activities, possessions, products, services, suppliers, etc. than is necessary for actual effectiveness, viability or comfort.
- Organisations and people tend to expand activities, materials, and stuff of all sorts, over time, and all of this 'stuff' and obligations become expensive and cumbersome to keep, especially where there are related costs of maintenance, registrations, training, monitoring, administrating and so on. The same applies to personal lives.
- The likelihood is that 80% of organisational viability/profit/effectiveness is derived from just 20% of each departmental range (product range, stock, services, etc.) The same probably applies to many people's personal lives.
Analysing these distribution ratios is the first step to streamlining, downsizing, rationalising, decluttering, etc.
- Often the findings of even a quick approximate analysis of one aspect of obligations or holdings (for example stock, suppliers, possessions) will immediately reveal remarkable opportunities to dramatically reduce range/obligations/holdings, with hardly any negative effects, but with massive positive benefits (for example, cost-savings, space-saving, and greatly decreased related obligations).
In business organisations, there are commonly huge cost savings to be achieved by rationalising product ranges according to Pareto's theory.
And in personal life, there are usually vast space savings to be made from using the same Pareto principles to declutter wardrobes, shoe-racks, bookshelves, and kitchen cupboards.
4. General situations of excess which need reducing, or where increased focus is necessary
Pareto's theory applies logic to increase effectiveness/efficiency for any situation where there is too much of anything - in business, organisations, work, personal life and anything else.
- Often in such situations, nothing changes - the situation is allowed to persist due to inertia (see Nudge theory) and because the apparent size of the task is daunting, so people don't know where or how to begin.
Pareto's theory offers a quick easy way to see clearly what must be retained, and what is unnecessary.
So when confronted with any situation requiring rationalisation, streamlining, and greater focus use these steps:
- Identify the 20% that is vital (and which probably enables at least 80% of productivity, performance, effectiveness, etc).
- This is your starting point. Retain this 20%, and nothing else, unless it serves a crucial purpose.
- Test effectiveness and implications of the reduced range/holding.
- Refer to aspects of change management and project management as appropriate.
Note that 20% is a guide. The actual percentage which represents optimal effectiveness/necessity depends on the situation, and on other considerations, which must be factored into the thinking.
And additionally in organisational Pareto-based change:
- Ensure proper consultation happens.
- Communicate and explain clearly to all affected.
- Devise/agree on a transitionary stage to enable a safe change, for example, consider forms of storage or archiving of the 'unnecessary' items to be discarded or discontinued, etc., just in case they are needed for emergencies.
- Ensure adequate warning and leeway are offered so that people affected by the change can make alternative arrangements.
- Offer and explain alternatives for options no longer available.
History of Pareto's Principle
Pareto's Principle is named after the man who first discovered and described the '80:20' phenomenon, Vilfredo Pareto (1848-1923), an Italian economist and sociologist. Pareto was born in Paris, and became Professor of Political Economy at Lausanne, Switzerland in 1893.
- An academic, Pareto was fascinated by social and political statistics and trends, and the mathematical interpretation of socio-economic systems.
- Vilfredo Pareto first observed the '80/20' principle when researching and analysing wealth and income distribution trends in nineteenth-century England (although some people suggest it was Italy - see the note below about England or Italy).
This discovery, its implications, and his wider findings appeared in the book: Cours d'Économie Politique (1896/97). Pareto noted that broadly 20 percent of the people owned 80 percent of the wealth.
- Beyond this Pareto also realised that this 'predictable imbalance' could be extrapolated (extended) to illustrate that, for example, 10 per cent would have 65 percent of the wealth and 5 percent of people would own 50 percent of the wealth.
Be aware that these other stated ratios are what Pareto found in his particular study - they are not scientific absolutes that can be transferred reliably to other situations, although the principle of 'varying ratios of disproportionate distribution' definitely can be found/applied in other situations.
Pareto then tested his 80-20 principle (including related numerical correlations) on other countries, and all sorts of other distribution scenarios, by which he was able to confirm that the 80:20 Principle, and similarly imbalanced numerical correlations, could be used reliably as a model to predict and measure and manage all kinds of effects and situations.
Thus while the very first application of the Pareto Principle, or 80-20 Rule, was originally in Pareto's suggestion that "Eighty percent of the wealth is held by twenty percent of the people," the principle was and can be extended to apply to almost all other distribution scenarios as well.
As a mathematical political and sociological innovator, Pareto developed other theories, for instance his 1916 book The Mind and Society predicted the growth of Fascism in Europe.
His most famous discovery was however the '80/20' statistical rule that bears his name.
- Sadly Pareto didn't live to see the general appreciation and wide adoption of his principle; he seems to not have been particularly effective at explaining and promoting the theory beyond academic circles, and it was left to other experts such as George Zipf and Joseph Juran to develop and refine Pareto's theories to make them usable and popular in business and management later towards the middle of the 20th century.
Pareto's Original study: Italy or England?
This footnote is appropriate because you might see statements that Pareto's original wealth distribution study analysed data for Italian society. But it wasn't Italy; it was England.
- This misunderstanding persists perhaps because of faulty inferences/assumptions based on Pareto's Italian parentage and early life in Italy.
- However, Pareto was actually born in France, and Pareto's study leading to the development of is '80/20' principle was carried out after he left Italy and had moved to the University of Lausanne in Switzerland (not that his location necessarily dictated his study territory).
A major and excellent reference work, The 80/20 Principle, by Richard Koch, 1997/98, published by Nicholas Brealey, clarifies the matter as follows.
Koch states (page 6 in the explanation of Pareto's first discovery of wealth distribution imbalance) that Pareto was:
"...looking at patterns of wealth and income on nineteenth-century England..." Koch continues, that Pareto also found, "...this pattern of imbalance [the predictably unbalanced distribution of wealth across the population] was repeated consistently whenever he looked at data referring to different time periods or different countries. Whether he looked at England in earlier times, or whatever data were available from other countries in his own time or earlier, he (Pareto) found the same pattern repeating itself..."
Additional supporting text:
"...The second is Pareto's law of income distribution. This law, which Pareto derived from British data on income, showed a linear relationship between each income level and the number of people who received more than that income. Pareto found similar results for Prussia, Saxony, Paris, and some Italian cities...." - Source: https://www.econlib.org/library/Enc/bios/Pareto.html, retrieved 2020.
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