Pareto Principle: How 80% Dominates

In the 19th century, Italian economist Vilfredo Pareto found that approximately 80% of the land in Italy was owned by 20% of the population. The Pareto Principle, which we commonly know as the 80/20 rule (or law of the vital few), was born and states: 

80% of the outcomes are due to 20% of the causes.

Since Pareto’s observation, this distribution has been found in other natural and social phenomena, such as:

• Human settlements: few large cities, many small villages.
• Oil reserves: few large fields, many small fields.
• Sizes of forest patches: few large patches, many small patches.

It has since been widely adopted in business practices, starting with management consultant Joseph M. Juran’s adoption with quality control and improvement, leading to the modern-day Total Quality Management and Six Sigma movement.

And not to forget the adage: “80% of the sales come from 20% of clients.”

While 80/20 is easy to remember, more important to know is that it’s roughly described by a statistical process called a power law distribution: a relative change in one quantity results in a proprotional relative change in the other quantity. 

In other words: a change in one variable results in an even greater change in another variable.

The distribution can be 80/20, but it could just as well be 90/10, 95/5 or even 99/1. What is important is that there is a fat tail (the few that dominate) and a long tail (the many that account for little).

Contrast this with the well-known bell curve (normal distribution), with a meaningful central “average” and increasingly rare standard deviations from that average when correctly sampled. Examples include human height and weight.

Knowing that many aspects in the world, in business and in your life are distributed according to a power law (or 80/20) distribution, helps you focus on the few things that matter, thereby improving your effectiveness, freeing up your time and improving the quality of your life. Alternatively, it helps you identify (business) opportunities when the “many” are underserved, allowing you to carve out your own niche. 

How to use the Pareto Principle and 80/20 Rule

In business, we can use two simple examples to illustrate the power of 80/20.

1. You can reevaluate your business and focus on effectiveness over efficiency. Ask yourself: which 20% of our clients give us 80% of the sales or profits? What do these clients have in common? This helps you focus on those types of clients that give you the biggest return. The same can be done to evaluate your product/service line, employee performance or activities within your business.

Another useful way is to combine it with inversion: which 20% of our clients take us 80% of our time? Or which 20% of our problems/flaws/bugs cause 80% of our complaints?

Either way you’ve now identified the areas to focus your resources on to get exponentially greater returns, allowing you to cut “waste” in your business.

2. When starting a new business, you significantly increase your odds of success by focusing on the long tail. This underserved population by larger players in your sector becomes your niche. As you grow and your business becomes stronger, you can move up the long tail toward the fat tail. Or simply live within the long tail: there are plenty of profits to be earned there. 

This is a proven strategy in entrepreneurship: success and failure often follows the successful or unsuccessful application of this strategy.

It’s also very common to start this way with search engine optimization (SEO) for a new website.

In life, we again can use two examples to illustrate the power of applying 80/20.

1. Relationships: we are a product of our mind (thoughts and beliefs), which is shaped by our experiences and our environment. There are people who give us energy, lift us up and are a boon to our life. Similarly there are people who drain our energy, hold us back or make us unhappier. Regularly applying 80/20 will improve your relationships and network, stimulating your growth and happiness.

Ask yourself: which people give me energy? Which people drain my energy? Which people provide me with opportunities? Which people only ask for favours or want to get things from me?

Answers to these questions help you understand who you should spend more or less time with, or cut out of your life altogether.

2. Tasks and activities: one of the best ways to improve your performance is asking yourself: which 20% of my activities lead to 80% of my results?

Answering this question tells you what to focus your effort on. Reducing time spent on other activities so you can allocate more to these 20% likely leads to overall greater results. Doing this exercise forces you to focus on effectiveness (doing what matters) instead of efficiency (how can I get more done with the same resources).

In addition to improved performance, this mindshift likely leads to a shorter, more enjoyable to-do list, reduce your frustration with not getting enough done, reduce your feeling of “I’m not good enough” and, in general, improve your general happiness.