What is Pareto’s principle?
Simply put Pareto’s principle (also called the 80-20 rule) says that 80 % of the results come from 20% of the causes (more or less).
Now, this is not always accurate. Sometimes it is 70-30 or sometimes a very small no can give a big result.
However, the gist of the rule states that a minority of the causes lead to the majority of the results.
Conversely, the majority of the causes do not contribute much to the result. It means that 80% of the work you put in is only leading to 20% results.
Businesses have been using this in optimizations of inventory and operations for a long time.
You can, however, apply this principle to almost everything.
How can we apply Pareto’s principle effectively in our lives? Well, let’s find out.
History of Pareto’s principle
Dr. Joseph Juran in the year 1940 gave credits for the 80-20 rule to Vilfredo Pareto.
Mr. Pareto was an economist that studied the land distribution in Italy and found out that only 20% of the residents owned approximately 80% of the nation’s land in his work, titled ‘Cours d’économie politique’.
After surveying other countries, he found similarities abroad.
Dr. Joseph, a product quality expert, applied the rule for quality analysis.
He found out that 80 % of the problems caused by most products are a result of just 20 % of defects.
His first works came out near 1950 but it wasn’t taken much seriously in the United States.
Most of his early work was in quality improvements with several Japanese companies.
The United States realized that Japan was growing as a quality leader in the world and becoming a bigger threat to the United States Industry.
It was then around 1970 that Dr. Joseph gained recognition in the west.
Pareto’s principle is applicable almost everywhere.
The commonsense assumption would say that 50% of the effort should result in 50% of the outcome but that is rarely the case.
It is uncanny how accurate Pareto’s principle is and the wide variety of use cases for it.
Any organic process will eventually become an example of Pareto’s principle unless massive and consistent efforts are done externally to overcome it.
Nowadays it is the core around which sales, project pipelines, quality checks, and supply chains work. Moreover, it is even applicable to our day-to-day lives.
Pareto’s principle examples
In sales, 80% of the revenue comes from 20% of the clients. Conversely, 80% of the clients only amount to 20% of the revenue collected.
Another angle to view sales from is that 20% of salespersons push 80% of the sales. Others just meet their minimum quota.
In a quality analysis as you read before 80% of the problems, come from 20% of defects.
A good example of the above is Microsoft that found out that by fixing 20% of the most reported bugs they could eliminate 80% of related errors and crashes in the system.
Traffic analysis says that 20% of the streets in the city amount to 80% of the traffic. You can easily relate to the busy streets in your city.
This principle is even used in the study of epidemics. Almost 20% of the individuals infected cause 80% of transmissions.
Advantages of Pareto’s principle
Pareto’s principle shows you where to direct your attention. If 20% of the clients are responsible for 80% of the business then you should put 80% of your resources to them.
That is, however, not how most people operate.
They give every client all their attention thereby spending most of their time catering to the clients that provide 20% of their revenue.
Banks use this principle and which is why privileged banking is a separate division in most banks.
High net worth individuals are given more time and attention because they are the most important to the bottom line of the bank.
This is why iPhone and Samsung release phones in limited colors; Shoemakers create average size shoes the most.
Pareto’s principle is the way you can have excellent resource allocation. It is how you can do more with working very less.
You realize it or you do not, either way, Pareto’s principle is all around you.
At first, you might only see it as an optimization tool that helps you allocate resources effectively. It is however so much more.
By realizing where effort is needed you can, not only reduce costs, you can increase revenue.
You can analyze 20% clientele which will provide you the demographic that you should target for advertising in the future.
An illustration of Pareto’s principle use in a business
You can see the products you are selling to them and see which products cater to the majority of audiences.
Even in every product, only 20% of the features will be useful for the majority of users, which will help you polish your products.
Look at your workforce, who are the people coming up with those features, and check what methods are they using to develop them.
Standardize those methods so that everyone in your workforce can use those patterns to their advantage. All those are just use cases for single manufacturing industry.
Two common use cases in most scenarios of Pareto’s principle are
1)Focus maximum effort on the minority causes to improve results
2)Observe what the 20% causes have in common and apply that to the other 80% so that results overall can be improved.
The possibilities are endless.
My experience of Pareto’s principle when giving exams
I was not good at academics. I was at my best an above-average student throughout my life however; the remarkable thing about it was that I studied very little. Like very little.
When preparing for major exams in ending school years or even College exams what I usually did was apply a cheat.
I would take the last 10 years of papers and see the question topics that came in exams repeatedly.
I would practice them thoroughly in that one day.
After I was happy with my practice I would read the remaining syllabus as if I was reading a newspaper.
Eventually, this became a bad habit of not studying until the final day. When the exam patterns and books changed in my third year, I was sad.
Now I tackle exams very differently but this was an example of Pareto’s principle in action.
Almost 20% of the course accounted for 80% of the marks and if you prepared it well enough, you could get a 60-70 % result with very little effort.
Misunderstanding Pareto’s principle
One of the things most people do when applying it is that they try to make it too simple.
Pareto’s principle is applicable everywhere but it requires thorough analysis on your part for your situation.
How Pareto’s principle applies to you will be quite different from how it applies to the world in general.
Say you open a store and try to sell the top 20% of the products sold in your country on your website.
Now you might think that since you are selling the top 20% of the sold products you will generate heavy sales and traffic. Not true.
- Selling the top 20% of products will push you into a saturated market.
- People that come to your website will not find products relate to one another, that they will on other websites.
For example -If I want to buy a bottle of coke, I will go to a website for Groceries. I would not go to one that sells some gems, some cold drinks, and some insurance products.
- Most high sales products are used to push other products. For example, a cheap and catchy gown is placed outside a shop just to bring the customer in so that a salesperson can upsell.
There might be other factors involved as well. You should view your results over a duration of time and then analyze what statistics show.
Keep a keen eye on your sales and notice what 20% of the product sells in what seasons.
Each month the trends will differ guiding you where to invest. This can transform a push-retail-model into a pull-model by batching.
The answers are almost never a shortcut that is in front of everyone. They are usually valuable insights that data and statistics reveal.
Areas where we can use Pareto’s principle in our daily lives
Here is a list of things you can apply Pareto’s principle to see a massive change in your life.
- Things you own
Perhaps the first and the most important thing on this list is our habits. Pareto’s principle can give you a diagnostic check on what you are doing wrong in your lives.
Habits are ingrained into our subconscious. Most of you do not even think before brushing your teeth in the morning. Similar habits account for almost half of our day.
Because of this subconscious nature of the habits we have, it is difficult to know sometimes what habits are dragging us back.
According to Pareto’s principle, 20% of our habits are responsible for 80% of the results.
Now whenever you have a result, be it good or bad, write down on a notepad which habits were responsible.
At the end of the week check, which 20% of the habits are contributing to 80% of losses? Try to curb them slowly.
Similarly, check which 20% of the habits lead to positive outcomes and strengthen them.
One thing that I have noticed is that all the habits that emphasize instant gratification often cause long term pains and habits that are based on a Long term philosophy lead to positive outcomes overall.
You are an average of the five people you spend the most time with. Pareto’s principle states that 20% of your relationships are bringing you 80% of happiness.
This is a clear indication that you have to be picky about who you spend your time with. This is true for both personal and professional relationships.
Time is precious people, and, we need to be sure that we give the people that are closest to us enough time and attention that they need.
Take a paper and write the names of 10 people closest to you in the respective order.
Do this for both, personal and professional relationships.
After you complete that, distribute 100 points in those 10. You will notice something amazing.
The 1st person will hold a much higher value than the 10th.
The first 3 might even hold 70-80% value.
Do you give those 2-3 people enough time and attention? Are you honest with them and do you follow through on the commitments you make with them?
If you do not then you can start now. If you want to cultivate fulfilling relationships with the people that are close to you, you can check out our blog on how to maintain relationships.
Things you own
Applying Pareto’s principle to the things we own, only 20% of the things you own provide 80% of the value.
Now this means that in day-to-day life you are not using all the things you own.
This is the problem with most of us. Consumerism and advertising have pushed products at a tremendous scale but this results in consumers buying things that they do not need.
Ask yourself what are the things that you have barely touched in the last year. You can easily remove all those things from your surroundings.
By doing this your focus will be more intensified on the things that are left.
Minimalism can bring a high level of focus and clarity in your life if only you can take the first step. Remove all the clutter around.
The work you do doesn’t matter if it is a job or a business, is the place you can see the power of Pareto’s principle with the most clarity.
In all the things, we mentioned until now the results are intangible. Besides, it will take some time and patience to see those results.
When it comes to your work however, Pareto’s principle will give you quick results that are drastic.
Pareto’s principle says that 20% of your time produces 80% of the results. Moreover, 20% of the tasks that you do are responsible for 80% of your results.
Both of those will have a high degree in common. So let us think about what this means.
If you have a working week of 5 days. 1 day accounts for 80% of the work.
What this means is that if you can identify the tasks that produce tremendous results and put effort only on those, 2 days will produce 160% of the results.
Let us be conservative and say that 2 days somehow don’t produce that much, but still, you will at least accomplish as much if not more than you do presently.
Well, how do we identify those tasks? If you cannot figure them out, don’t worry.
In our blog on Procrastination, we talk about a matrix called Eisenhower Matrix.
What about everything else? What about all the tasks that you don’t produce drastic results in but still are a part of your job title?
Simply, just delegate. Delegate the other 80% to a junior or try using a virtual assistant that you can hire to do the mundane stuff.
It is something I learned from the amazing book from Tim Ferris called The 4-hour workweek.
Ok, so there is a bonus for those of you who reached this far. You see Pareto’s principle works almost everywhere. Moreover, it is scarily accurate.
Conventional wisdom would suggest that 50% of the work should produce 50% of output, but that is very rare.
If 20% of causes result in 80% of the outcome wouldn’t Pareto’s principle equally apply to them too? Well, yes it would.
This means that 4% of the total causes will return 64% of the results.
This week just try to identify what those 4% causes are. 80-20 is a way of thinking and a mindset. It will more often than not, lead you to gems hidden in plain sight.
It will show you where the real value is. A small exercise you can do is to look for work that you find fulfilling. Do you know what your passions are?
We provide a free eBook called The Perfect Beginning that might help you in finding those callings.
Well, that’s all for this post. Have a good day and a good life.