The Pareto Principle, or 80/20 rule, describes this general idea: that 80% of the output comes from just 20% of the input. This concept is well-known among business operators and economists. But the idea of imbalanced inputs and outputs extends to many disciplines and even personal time management.
Origin and application of the Pareto Principle
The popular origin story of the Pareto Principle is that, around the turn of the 20th century, Italian economist Vilfredo Pareto began to notice that only 20% of the pea plants in his garden were generating 80% of the healthy pea pods.
This observation got him thinking about the uneven distribution of Italian land ownership. To wit: 80% of Italy was owned by 20% of the population. Developing this idea further, he began looking at different industries and found that, in general, 20% of companies generated 80% of overall production. He generalized his observation into a principle that 80% of the output comes from only 20% of the input.
In the mid-20th century, American business theorist Joseph Juran applied the rule even more broadly—to business challenges beyond just output. He found that most quality control problems resulted from a small percentage of the causes, and coined the phrase, “the vital few and the trivial many.”
The British NHS Institute for Innovation and Improvement later generated further useful guidelines on efficiency using the Pareto Principle, including:
- 80% of innovations come from 20% of staff.
- 80% of decisions come from 20% meeting time.
- 80% of success comes from 20% efforts.
Benefits and limitations of the Pareto Principle
The great benefit of the Pareto Principle is prioritization: it helps individuals and organizations allocate resources where they’ll have the highest impact. For example, If 20% of design flaws lead to 80% of malfunctions, the Pareto Principle instructs the business to fix those first.
However, there are limitations, including:
- You shouldn’t apply the rule literally. The 80-20 rule is not a mathematically accurate equation. For instance, 30 percent of workers might generate 60 percent of results.
- The Pareto Principle can suggest what is most important to fix, but not how to fix it. It also may point to superficial problems, rather than tracking down a root cause.
- Pareto analysis focuses on past dates but doesn’t necessarily help forecast future issues.
- Sometimes diversification is a better strategy.
How is Pareto analysis used?
Applying the Pareto Principle in a business setting is called Pareto Analysis. Pareto Analysis is used by business management in many industries today to identify which factors are critical to the company’s success and to focus on those things. In other words, to identify the best assets, or “the vital few,” and use them efficiently. This method of analysis takes all of the contributing factors to a problem, evaluates their impact, and ranks them.
Here’s what a simple step-by-step Pareto analysis might look like:
- Define the problem. For example, a business launched a new product, but is getting complaints about its usability. They need to figure out what to fix first.
- Identify and list inputs. The company asks customer service to provide a list of all the complaints they’ve received.
- Quantify the impact of each input. Customer service also evaluates which usability problems resulted in a refund, versus which just required some troubleshooting.
- Group inputs by some factor. The product team looks at all problems that resulted in refunds and groups them by nature of the problem.
- Compare them and rank. The product team prioritizes fixing the few problems that resulted in the most refunds.
The Pareto Principle applies outside of business settings, as well. For example:
- You can apply it to your personal time management, to weed out things that take up a lot of time, but don’t contribute to your personal bottom line (whatever that may be).
- You might notice that you wear 20% of your clothes 80% of the time, and so streamline your closet and decrease your spending on clothing.
- You might reorganize your kitchen so that the 20% of cookware that you use 80% of the time is the most accessible in your kitchen.
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