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What Is The 80-20 Rule?: Pareto Principle

The document discusses the 80-20 rule, also known as the Pareto Principle. The 80-20 rule asserts that 80% of outcomes result from 20% of causes. In business, the goal is to identify the most productive 20% of inputs and prioritize them. The principle can be applied beyond business to areas like personal finance. The document then provides an example of a student applying the 80-20 rule to improve her blog by focusing marketing efforts on the top 20% of traffic and audience characteristics.

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Krešimir Dodig
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170 views4 pages

What Is The 80-20 Rule?: Pareto Principle

The document discusses the 80-20 rule, also known as the Pareto Principle. The 80-20 rule asserts that 80% of outcomes result from 20% of causes. In business, the goal is to identify the most productive 20% of inputs and prioritize them. The principle can be applied beyond business to areas like personal finance. The document then provides an example of a student applying the 80-20 rule to improve her blog by focusing marketing efforts on the top 20% of traffic and audience characteristics.

Uploaded by

Krešimir Dodig
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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What Is the 80-20 Rule?

The 80-20 rule, also known as the Pareto Principle, is an aphorism which asserts
that 80% of outcomes (or outputs) result from 20% of all causes (or inputs) for
any given event. In business, a goal of the 80-20 rule is to identify inputs that are
potentially the most productive and make them the priority. For instance, once
managers identify factors that are critical to their company's success, they should
give those factors the most focus.

Although the 80-20 axiom is frequently used in business and economics, you can
apply the concept to any field—such as wealth distribution, personal finance,
spending habits, and even infidelity in personal relationships.

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The Pareto Principle (80-20 Rule)

KEY TAKEAWAYS

 The 80-20 rule maintains that 80% of outcomes (outputs) come from 20%
of causes (inputs).
 In the 80-20 rule, you prioritize the 20% of factors that will produce the best
results.
 A principle of the 80-20 rule is to identify an entity's best assets and use
them efficiently to create maximum value.
 This "rule" is a precept, not a hard-and-fast mathematical law.
Understanding the 80-20 Rule
You may think of the 80-20 rule as simple cause and effect: 80% of outcomes
(outputs) come from 20% of causes (inputs). The rule is often used to point out
that 80% of a company's revenue is generated by 20% of its customers. Viewed
in this way, then it might be advantageous for a company to focus on the 20% of
clients that are responsible for 80% of revenues and market specifically to them
—to help retain those clients, and acquire new clients with similar characteristics.

Core Principle
At its core, the 80-20 rule is about identifying an entity's best assets and using
them efficiently to create maximum value. For example, a student should try to
identify which parts of a textbook will create the most benefit for an upcoming
exam and focus on those first. This does not imply, however, that the student
should ignore the other parts of the textbook.

Often Misinterpreted
The 80-20 rule is a precept, not a hard-and-fast mathematical law. In the rule, it
is a coincidence that 80% and 20% equal 100%. Inputs and outputs simply
represent different units, so the percentage of inputs and outputs does not need
to equal 100%.

The 80-20 rule is misinterpreted often. Sometimes the misunderstanding is the


result of a logical fallacy—namely, that if 20% of inputs are most important, then
the other 80% must not be important. At other times, the confusion stems from
the coincidental 100% sum.

 
Business managers from all industries use the 80-20 rule to help narrow their
focus and identify those issues that cause the most problems in their
departments and organizations.

80-20 Rule Background


The 80-20 rule—also known as the Pareto principle and applied in Pareto
analysis—was first used in macroeconomics to describe the distribution of wealth
in Italy in the early 20th century. It was introduced in 1906 by Italian economist
Vilfredo Pareto, best known for the concepts of Pareto efficiency.

Pareto noticed that 20% of the pea pods in his garden were responsible for 80%
of the peas. Pareto expanded this principle to macroeconomics by showing that
80% of the wealth in Italy was owned by 20% of the population.

In the 1940s, Dr. Joseph Juran, prominent in the field of operations management,
applied the 80-20 rule to quality control for business production. He
demonstrated that 80% of product defects were caused by 20% of the problems
in production methods. By focusing on and reducing the 20% of production
problems, a business could increase its overall quality. Juran coined this
phenomenon "the vital few and the trivial many."

Benefits of the 80-20 Rule


Although there is little scientific analysis that either proves or disproves the 80-20
rule's validity, there is much anecdotal evidence that supports the rule as being
essentially valid, if not numerically accurate.
Performance results of salespeople in a wide range of businesses have
demonstrated success by incorporating the 80-20 rule. In addition, external
consultants who use Six Sigma and other management strategies have
incorporated the 80-20 principle in their practices with good results.

Real-World Example of the 80-20 Rule


A Harvard graduate student, Carla, was working on an assignment for her digital
communications class. The project was to create a blog and monitor its success
during the course of a semester. Carla designed, created, and launched the site.
Midway through the term, the professor conducted an evaluation of the blogs.
Carla's blog, though it had achieved some visibility, generated the least amount
of traffic compared with her classmates' blogs.

When to Apply the 80-20 Rule


Carla happened upon an article about the 80-20 rule. Because it said that you
can use this concept in any field, Carla began to think about how she might apply
the 80-20 rule to her blog project. She thought: I spent a great deal of my time,
technical ability, and writing expertise to build this blog. Yet for all of this
expended energy, I am getting very little traffic to the site.

She knew that even if a piece of content is spectacular, it is worth virtually


nothing if no one reads it. Carla deduced that perhaps her marketing of the
blog was a greater problem than the blog itself.

Application
To apply the 80-20 rule, Carla decided to assign her "80%" to all that went into
creating the blog, including its content; and as her "20%," she designated the
blog's visitors.

Using web analytics, Carla focused closely on the blog's traffic. She asked:

 Which sources comprise the top 20% of traffic to my blog?


 Who are the top 20% of my audience that I wish to reach?
 What are the characteristics of this audience as a group?
 Can I afford to invest more money and effort into satisfying my top-20%
readers?
 In terms of content, which blog posts constitute the top 20% of my best-
performing topics?
 Can I improve upon those topics, and get even more traction from my
content than I'm getting now?

Carla analyzed these questions and edited her blog accordingly:


1. She adjusted the blog's design and persona to align with those of her top-
20% target audience, a strategy common in micromarketing.
2. She rewrote some content to meet her target reader's needs more fully.

Although her analysis did confirm that the blog's biggest problem was its
marketing, Carla did not ignore its content. She remembered the common fallacy
cited in the article—if 20% of inputs are most important, then the other 80% must
be unimportant—and did not want to make that mistake.

Results
By applying the 80-20 rule to her blog project, Carla understood her audience
better and targeted her top-20% of readers more purposefully. She reworked the
blog's structure and content based on what she learned, and traffic to her site
rose by more than 220%.

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