What is the Pareto Principle?
This model or theory suggests that 20% of your work produces 80% of the results. This is an extremely useful model, because once you understand its implications, you can reorganise your efforts into that most profitable 20% - and waste less time on the less profitable areas.

You may have heard of the same principle under a different name. It goes under various guises, including:

• The Pareto Principle
• The Pareto Law
• Pareto's Law
• The 80:20 Rule
• Pareto Theory
• The Principle of Least Effort (a term coined by George Zipf in 1949 based on Pareto's theory)
• The Principle of Imbalance
• The 80-20 Principle
• The Rule of the Vital Few (an interpretation developed by Joseph Juran) and other combinations of these expressions.

Who Was Pareto?

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 in 1893. He was fascinated by social and political statistics and trends, and the mathematical interpretation of socio-economic systems.

Pareto first observed the 80-20 principle when researching and analysing wealth and income distribution trends in 19th century England, in which he noted that 20% of the people owned 80% of the wealth. He also found that this 'predictable imbalance' could be extrapolated (extended) to illustrate that, for example, 10% of people would have 65% of the nation’s wealth, and 5% of people would own 50% of the wealth, and so on.

Pareto then tested his 80-20 principle on other countries and all sorts of other distribution scenarios, by which he was able to confirm that the 80-20 principle had a very wide application. He used it as a model to predict, measure and manage all kinds of effects and situations.

Regrettably 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. It was left to other experts such as George Zipf and Joseph Juran to develop Pareto's theories, to make them usable and popular in business and management – which happened towards the middle of the 20th century.

How Does the Pareto Principle Apply to Business?

At a very simple level, the 80-20 Rule indicates that where two related data sets or groups exist (typically cause and effect, or input and output):

• 80% of output is produced by 20% of input.

• 80% of outcomes are from 20% of causes.
• 80% of contribution comes from 20% of the potential contribution available.

The exact 80-20 ratio does not apply to every situation (neither is the model based on a ratio in which the two figures must add to make 100), but the general principle has endless applications - in management, social study, demographics, all types of distribution analysis, and business and financial planning and evaluation.

In fact, the general idea is more important to remember than the actual ratio, because even where a situation does contain an 80-20 correlation, other ratios might be more significant. For example:

• 99-22 (illustrating an even greater concentration than 80:20 and therefore more significance at the 'top-end')
• 5-50 (i.e. just 5% of results or benefit coming from 50% of the input or causes or contributors, obviously indicating an enormous amount of ineffectual activity or content)

The Benefits of Using Pareto in Your Business
Here are some examples of Pareto's Principle as it applies to various situations. According to the 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% of results come from 20% of efforts.
• 80% of activity will require 20% of resources.
• 80% of usage is by 20% of users.
• 80% of the difficulty in achieving something lies in 20% of the challenge.
• 80% of revenue comes from 20% of customers.
• 80% of problems come from 20% of causes.
• 80% of profit comes from 20% of the product range.
• 80% of complaints come from 20% of customers.
• 80% of sales will come from 20% of sales people.
• 80% of corporate pollution comes from 20% of corporations.
• 80% of work absence is due to 20% of staff.
• 80% of road traffic accidents are caused by 20% of drivers.
• 80% of a restaurant's turnover comes from 20% of its menu.
• 80% of your time spent on this website will be spent on 20% of this website.

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. This has enormous implications for:

• Your Business Development Activities. Which bring you the most reward and which take up the most time and effort?
• Your Networking. Which events are the most productive for you, which bring you the best contacts and which create the most opportunities for you?
• Your Reputation. Which activities, associations, outcomes, networks and actions are bringing you the most kudos, prosperity and recognition?
• Your Referrals. Which sources and people are bringing you the most and best results? Which scripts and questions are you using and which times are you asking?
• Your Personal and Business Relationships. Which people are you learning from and benefiting from being around? Which associations are taking up the most time for the least reward?
• Your Time Management. Time is your most precious asset. Which people, processes, activities and thoughts take up most of your time for the least payback?

You can probably think of a few more. But thinking isn't doing, so what can you DO to apply this to your life and make a positive difference to your outputs, your income and your well-being? 

 

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