The definition and meaning of the Pareto Principle, or 80/20 rule, is a theory, commonly used in business, that maintains that 20% of the items in a company or system account for 80% of the effect. For example, if a company has 100 products, twenty of the best-selling ones are likely to represent 80% of the profit.
The Pareto Principle does not only apply to good things. Approximately 80% of all customer complaints are believed to be related to 20% of the products. Twenty percent of all computer bugs in existence at any one time are responsible for four-fifths of all crashes.
The Principle does not stipulate that every single situation has an exact ratio of 80/20 – it just puts forward that figure as a typical distribution. The thrust of the message is that a small percentage of inputs are responsible for the majority of outputs.
The Pareto analysis helps companies determine where to invest their money. If you have 10 racehorses, and two of them bring in 80% of your prize money, it makes sense to spend most of your horse training resources on those two, rather than the other eight – you would get a better return on your investment.
The Pareto Principle is named after Italian economist, engineer, sociologist and political scientist Vilfredo Pareto (1848-1923), who in 1906 pointed out that in his country twenty percent of the population owned eighty percent of all property. He suggested that this 80/20 ratio may be a natural law because he had found several places in the physical world with similar distributions.
Dr. Joseph Duran (1904-2008), a Romanian-American electrical engineer and management consultant, known today as the ‘father of quality control’, advanced Pareto’s theory in the 1940s. He coined the term ‘The Pareto Principle’ for the 80/20 ratio.
More generally, it is the observation that the majority of things in nature are not distributed evenly. The Pareto Principle can mean:
– 20% of the employees account for 80% of total production
– 20% of the input accounts for 80% of the result
– 20% of all customers represent 80% of total sales
– 20% of the features account for 80% of the usage
– 20% of all computer bugs are responsible for 80% of the crashes
– 20% of the products account for 80% of all customer complaints
– 20% of the clothes in my wardrobe are used 80% of the time
According to statisticalconcepts.blogsport.co.uk: “A Pareto chart (above) is a graphical representation that displays data in order of priority. It can be a powerful tool for identifying the relative importance of causes, most of which arise from only a few of the processes, hence the 80:20 rule. Pareto Analysis is used to focus problem solving activities, so that areas creating most of the issues and difficulties are addressed first.”
The 80/20 figures are simply illustrative. They illustrate the lack of symmetry that frequently appears between work put in and results obtained.
For example, 15% of work may account for 85% of returns, or seventy five percent of problems could be resolved by focusing on 25% of the causes. The sum of the two figures do not necessarily have to add up to 100 every time.
According to the Cambridge Dictionary, the Pareto Principle is:
“The idea that a small quantity of work or resources (= time, money, employees, etc.) can produce a large number of results.”
The Pareto Principle shows life isn’t fair
In an ideal world, each worker would contribute towards the end product equally, wealth would be distributed among the population evenly. This is hardly ever the case. In reality, each unit of time or work does not contribute the same amount.
The 80/20 rule suggests that the majority of things have an unequal distribution. Out of every five items, one will be ‘great’. That great thing, person, feature or idea will account for the majority of the impact.
We would like life to be fair – where each item contributes and receives equal amounts – but it rarely happens that way. Things are hardly ever have a 1/1 ratio.
Vilfredo Pareto (1848-1923) once said: “For many events, roughly 80% of the effects come from 20% of the causes.” (Image: Wikipedia)
Pareto Principle Analysis in our personal lives
Many personal aspects of our lives appear to follow the 80/20 principle. If you have an account, look at the ‘likes’ on your Facebook posts. You will most likely find that approximately 80% of your likes come from about twenty percent of your friends.
Even SMS messages, when they used to be more common before the likes of WhatsApp came onto the scene, followed the Pareto Principle. Twenty percent of contacts in most people’s mobile phones represented about 80% of all messages, according to pinnacle.com.
Christian Jackman, of betting site tipstersupermarket, said: “Any given year 80% of the profits [from betting] will be generated in pretty much two and a half months. I’ve found that nearly all the profits from a years’ betting are generated in just 2 months of the year. That means that for the other ten months you’re pretty much treading water or maybe even losing money.”
Why is the Pareto Principle useful
The Pareto Principle helps us realize that most outcomes are the result of a minority of inputs. Therefore, if…
– 20% of workers account for four-firths of the results, we should focus on rewarding them, or perhaps sending the other 80% on tailor-made training courses.
– 20% of customers make up 80% of our income, we should channel more resources towards satisfying those customers.
– 20% of bugs are responsible for 80% of crashes, so our priority should be fixing those bugs first.
If we can determine where that 20% is, focusing on them gives us a better return on invested time and resources.
Video – The Pareto Principle Analysis
This Fight Mediority video explains what the Pareto Principle is and shows how it appears in virtually every aspect of our lives, including business, social interactions and relationships.