The Pareto Principle (80:20 Rule)

“The better is the enemy of the good” – Voltaire (1694 – 1778)

Introduction

… or perfectionism prevents good results. In this article, I introduce you to the principles of the Pareto Principle, often called 80:20 Rule. I suggest you as well conclusions on the effective application of the knowledge gained.

Origin of the Pareto Principle

The Pareto principle was named after the Italian economist Vilfredo Federico Pareto (1843-1923). It says that for many tasks, 20% of the total expenditure accounts for 80% of the overall result. According to the principle the much larger 80% share of the total expenditure contributes only 20% to the overall result.

Visualization of the Pareto Principle

The principle was recognized the first time in a study by Pareto about land ownership in Italy. In the study Pareto found that about 20% of the population own about 80% of the land. From today’s point of view, this derivation can no longer easily be reproduced. Although it was still true in 1989 that about 20% of the world’s population possessed about 82% of the available assets, however, today (2018) the distribution of assets is drastically shifting in the direction of 1:99.

Even if the derivation of the Pareto principle is no longer reproducible from today’s point of view and considering that the 80:20 rule can not be arbitrarily applied to all imaginable tasks, the Pareto principle provides a proven method for the optimization of the use of resources and the estimation of required expenditures.

Examples of use in practice

In this section I would like to present you some examples which shall provide a fundamental understanding on how to apply the Pareto Principle to the real world. It is important that the Pareto principle should not be understood as a precision tool. Rather, it should help you to set up hypotheses for further investigation and optimization for relevant applications.

Customer and product analysis

For many companies, 80% of customers are responsible for 80% of their sales and profits. The aim of a customer analysis is the identification of this relevant customer group and the corresponding (deeper) penetration of the identified markets.

As with customers, many companies believe that 80% of their product portfolio is 80% responsible for sales and profits. Due to the importance of these products, it is essential to outperform the competition, even if it neglects products that do not significantly contribute to the company’s success.

Time management

For many tasks, 80% of the desired result is generated in 20% of the time used. Therefore, it is important to have a good understanding of the quality level of the result in order to achieve the desired benefit. If 80% is sufficient, then it is often more sensible to focus on the next task than to invest the major share of the time in a perfection that is not required. As a thumbs up, it can be stated that effective time management applying Pareto can boost one’s own productivity up to a factor of five.

Software and product development

Crucial to the success of lean “apps” on mobile devices is the fact that 80% of users only use 20% of the features of complex products. Lean applications usually serve the needs of most users more efficiently and cost-effectively. In practice the 20% of users who need the complex product are usually those who generated the necessary product sales. Accordingly, the broad user base is offered low-cost or even free basic versions of the mobile device programs, while full versions for professional users generate the corresponding revenues.

Cloud Services vs. own data center

For 80% of the required use cases only 20% of a data centers capabilities is needed. However, 80% of the available capabilities must be maintained in the own data center for reasons of reliability and for cushioning of load peaks. Cloud services, which charge for the actually requested service instead of the possibly required service, can therefore offer significantly more economical operating models.

Infrastructure planning and urban development

80% of the traffic flows over only 20% of the (well developed) roads. If these 20% are prioritized, this leads to a relief of the “slow lanes” and thus to more satisfaction of the citizens. The reason is, that because of less traffic, the own side street is quiet and despite the lack of structural measures in better shape.

Project management and risk management

80% of the total risk is caused by 20% of individual risks. Identifying and minimizing these risks makes sense.

Sales and Business Development

80% of sales are generated by 20% of sales expenses. Accordingly, it makes sense to identify the top forces and bind them to the company.

Project delivery and team work

80% of a teams effort is provided by 20% of the team members. However, often it is bad advice to kick out the other 80%, as this would overload the top performers and could hinder an intact team to perform effectively. Rather, it is important for companies to identify their core teams and prioritize them.

Summary and conclusion

The 80:20 rule is a useful rule. It provides guidance for a variety of applications. Please be aware that the 80:20 rule is not a rigorous science. Rather, the rule should serve as a guide and help you to formulate working hypotheses on how relevant tasks can be optimized.