What Is The 80-20 Rule?
The 80-20 rule or Pareto Principle is a phenomenon primarily used in business and economics that explains how 20% of efforts or inputs can yield 80% of results or outputs. It helps identify and focus on the crucial factors to create maximum value while delegating the least important ones.
In business management, it assists in organizing and prioritizing company resources to boost productivity and revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.. This principle of factor sparsity also applies to other aspects of life, such as time management, relationships, goal-setting, productivity, etc. Even though percentages might not be 80-20 in every case, they remain close enough to make Pareto Distribution universal.
- The 80-20 Rule, often known as Pareto Principle, depicts how 20% of efforts or inputs get 80% results or outputs. It aids in the sorting and prioritization of the most critical factors for the best results.
- Although common in business and economics, the principle also applies to different spheres of life, including time management, relationships, goal-setting, productivity, etc.
- Italian economist Vilfredo Pareto introduced the 80-20 rule in 1906 after finding that 20% of the population own 80% of the land and wealth in the nation.
- Wealth distribution, quality control, business management, customer retention and acquisition, budgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time., etc., are some of the advantages of the 80/20 principle.
How Does The 80-20 Rule Work?
Whether it is business or personal life, everyone wants to achieve the maximum while making consistent efforts toward their core activities. While it is not always possible to dedicate too much time or utilize all of the resources, it is wise to concentrate on the most productive inputs to get the desired result. The 80-20 rule observes that 20% of efforts are responsible for 80% of outcomes for any given event or circumstance.
Italian economist Vilfredo Pareto first introduced the concept in 1906 while researching wealth distribution in Italy. He devised a logarithmic mathematical formula for this. He discovered that 20% of the population, comprising the most powerful, influential, and wealthier sections of the society, held 80% of the land and wealth. Pareto used this 80-20 rule to study the uneven distribution of wealth in other countries. It was later explained through graphs by mathematician M.O. Lorenz.
In the 1940s, product quality expert Dr. Joseph M. Juran endorsed the Pareto Principle. He referred to it as the universal phenomenon applicable and effective in quality control as well. Juran stated that 20% of defects cause 80% of problems in business production and manufacturing. He coined the phrase “the vital few and the trivial many” to describe those few causes and many issues.
Applications of 80-20 Principle
Let us take a look at how the 80-20 rule applies to different spheres of life:
#1 – 80-20 Rule In Time Management
Student A studied all day, and student B only 4 hours a day for the same examination. Still, the latter managed to do better than the former. The only difference was in the quality of study they did. While A studied for more hours, she got frequently distracted by phone calls, text messages, social media notifications, etc.
On the other, Student B blocked out all distractions and focused on studies for a few hours. As a result, student B received 80% of the results after putting in just 20% of the effort.
#2 – 80-20 Rule In Relationships
Mark leaves the office on time to spend the rest of the day with his family. However, he finds his wife and son dissatisfied with the amount of time he devotes to them. On the other hand, George arrives home late from work but ensures spending the last two hours of the day with his wife and kids. Surprisingly, he receives no complaints from his family as they feel satisfied with the way he handles everything.
The difference is that the time Mark spends with his family involves multiple distractions, such as social media. For George, the time is only family time. Even though George works longer hours, he makes the best out of those few hours, indicating how devoting 20% time could make up for the lost 80%.
#3 – 80-20 Rule In Diet
According to Australian nutritionist Teresa Cutter, if a person consumes nutritious food 80% of the time while eating less healthy food for the other 20% of the time, they can still lose weight.
The vital few contributions (20%) beat the trivial many (80%) in the above case, as added by Juran to the Pareto Law.
80-20 Rule Examples
Let us consider the following 80-20 principle examples to have a better understanding of the concept and its applicability:
With everything going online these days, businesses are becoming more concerned with increasing their internet presence. But they ignore what they will offer customers when they agree to purchase from them in the process.
Businesses make sure their logo is attractive, the website is engaging, and graphics for products and services are appealing to get more leads in a short time. As a result, they successfully get leads which they convert into customers. But what happens next?
Customers may or may not return after their first purchase. Whether or not a customer returns to the brand does not depend on its logo or website. Instead, it will rely on the quality of products and services it offers. While focusing on grabbing customer attention, the customer retention aspect remains neglected. By the time business realizes this, it has already lost the faith of customers.
Therefore, a business must maintain quality standards (20%) and delegate things like online brand visibility (80%) to satisfy and retain customers.
Small companies often struggle during economic downturns. Among many reasons is them ignoring the needs of their patrons or customers. All they do is focusing on producing items to satisfy their clients without even knowing what they want.
In other words, these firms should make efforts to know the desires and expectations (20%) of their customers before developing a product and make a profit (80%). Having a diversified approach is one of the essential aspects of a business.
As customer retention and acquisition would lessen the operational risksOperational RisksOperational risk is the business uncertainty a company comes across in the industry while executing its everyday business operations. Such risks arise due to internal system breakdown, technical issues, external factors, managerial problems, human errors or information gap. , it will help small companies survive even the most challenging times. It indicates how the 80-20 rule in marketing is applicable in such cases.
Let us look at the benefits of the Pareto Principle or the 80/20 rule:
- Helps identify and focus on crucial inputs, resulting in better time management
- Improved business leadership due to the enhanced interaction with team members on how to manage delegated tasks
- Efficient sorting and prioritizing of tasks, which helps in proper goal setting
- From business management to personal relationships, the Pareto Principle holds importance in every sphere of life
- Businesses get to know which set of clients and customers to retain and acquire to maximize their revenuesMaximize Their RevenuesRevenue maximization is the method of maximizing a company's sales by employing methods such as advertising, sales promotion, demos and test samples, campaigns, references. It aims to capture a larger market share in an industry. Technically, revenue is maximized when MR (Marginal Revenue) equals zero.
Frequently Asked Questions (FAQs)
Known as the Pareto Principle or Pareto Law, the 80-20 rule signifies the importance of 20% of inputs or activities in yielding 80% of outputs or results. It commonly applies to wealth distribution, quality control, time management, budgeting, personal relationships, goal-setting, etc.
When it comes to studying, the 80-20 rule argues that students can do well in an examination even if they commit fewer hours to prepare but focus exclusively on the quality of their study.
A person can apply the 80-20 principle in a relationship by making small moments spent with their loved ones the quality moments. For example, after working all day, if a man manages to spend little yet quality time (20%) with his family, he can still satisfy their relationship needs (80%).
This has been a guide to the 80-20 rule and its meaning. Here we discuss how the 80-20 principle works along with application, examples and advantages. You may also have a look at the following articles –