80-20 Rule Definition & Example (Pareto Principle)

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) ... FinancialAdvisor PortfolioConstruction WhatIsthe80-20Rule? The80-20rule,alsoknownastheParetoPrinciple,isanaphorismwhichassertsthat80%ofoutcomes(oroutputs)resultfrom20%ofallcauses(orinputs)foranygivenevent.Inbusiness,agoalofthe80-20ruleistoidentifyinputsthatarepotentiallythemostproductiveandmakethemthepriority.Forinstance,oncemanagersidentifyfactorsthatarecriticaltotheircompany'ssuccess,theyshouldgivethosefactorsthemostfocus. Althoughthe80-20axiomisfrequentlyusedinbusinessandeconomics,youcanapplytheconcepttoanyfield—suchaswealthdistribution,personalfinance,spendinghabits,andeveninfidelityinpersonalrelationships. 2:23 TheParetoPrinciple(80-20Rule) KeyTakeaways The80-20rulemaintainsthat80%ofoutcomes(outputs)comefrom20%ofcauses(inputs).Inthe80-20rule,youprioritizethe20%offactorsthatwillproducethebestresults.Aprincipleofthe80-20ruleistoidentifyanentity'sbestassetsandusethemefficientlytocreatemaximumvalue.This"rule"isaprecept,notahard-and-fastmathematicallaw. Understandingthe80-20Rule Youmaythinkofthe80-20ruleassimplecauseandeffect:80%ofoutcomes(outputs)comefrom20%ofcauses(inputs).Theruleisoftenusedtopointoutthat80%ofacompany'srevenueisgeneratedby20%ofitscustomers.Viewedinthisway,thenitmightbeadvantageousforacompanytofocusonthe20%ofclientsthatareresponsiblefor80%ofrevenuesandmarketspecificallytothem—tohelpretainthoseclients,andacquirenewclientswithsimilarcharacteristics. CorePrinciple Atitscore,the80-20ruleisaboutidentifyinganentity'sbestassetsandusingthemefficientlytocreatemaximumvalue.Forexample,astudentshouldtrytoidentifywhichpartsofatextbookwillcreatethemostbenefitforanupcomingexamandfocusonthosefirst.Thisdoesnotimply,however,thatthestudentshouldignoretheotherpartsofthetextbook. OftenMisinterpreted The80-20ruleisaprecept,notahard-and-fastmathematicallaw.Intherule,itisacoincidencethat80%and20%equal100%.Inputsandoutputssimplyrepresentdifferentunits,sothepercentageofinputsandoutputsdoesnotneedtoequal100%. The80-20ruleismisinterpretedoften.Sometimesthemisunderstandingistheresultofalogicalfallacy—namely,thatif20%ofinputsaremostimportant,thentheother80%mustnotbeimportant.Atothertimes,theconfusionstemsfromthecoincidental100%sum. Businessmanagersfromallindustriesusethe80-20ruletohelpnarrowtheirfocusandidentifythoseissuesthatcausethemostproblemsintheirdepartmentsandorganizations. 80-20RuleBackground The80-20rule—alsoknownastheParetoprincipleandappliedinParetoanalysis—wasfirstusedinmacroeconomicstodescribethedistributionofwealthinItalyintheearly20thcentury.Itwasintroducedin1906byItalianeconomistVilfredoPareto,bestknownfortheconceptsofParetoefficiency. Paretonoticedthat20%ofthepeapodsinhisgardenwereresponsiblefor80%ofthepeas.Paretoexpandedthisprincipletomacroeconomicsbyshowingthat80%ofthewealthinItalywasownedby20%ofthepopulation. Inthe1940s,Dr.JosephJuran,prominentinthefieldofoperationsmanagement,appliedthe80-20ruletoqualitycontrolforbusinessproduction.Hedemonstratedthat80%ofproductdefectswerecausedby20%oftheproblemsinproductionmethods.Byfocusingonandreducingthe 20%ofproductionproblems,abusinesscouldincreaseitsoverallquality.Jurancoinedthisphenomenon"thevitalfewandthetrivialmany." Benefitsofthe80-20Rule Althoughthereislittlescientificanalysisthateitherprovesordisprovesthe80-20rule'svalidity,thereismuchanecdotalevidencethatsupportstheruleasbeingessentiallyvalid,ifnotnumericallyaccurate. Performanceresultsofsalespeopleinawiderangeofbusinesseshavedemonstratedsuccessbyincorporatingthe80-20rule.Inaddition,externalconsultantswhouseSixSigmaandothermanagementstrategieshaveincorporatedthe80-20principleintheirpracticeswithgoodresults. Real-WorldExampleofthe80-20Rule AHarvardgraduatestudent,Carla,wasworkingonanassignmentforherdigitalcommunicationsclass.Theprojectwastocreateablogandmonitoritssuccessduringthecourseofasemester.Carladesigned,created,andlaunchedthesite.Midwaythroughtheterm,theprofessorconductedanevaluationoftheblogs.Carla'sblog,thoughithadachievedsomevisibility,generatedtheleastamountoftrafficcomparedwithherclassmates'blogs. WhentoApplythe80-20Rule Carlahappeneduponanarticleaboutthe80-20rule.Becauseitsaidthatyoucanusethisconceptinanyfield,Carlabegantothinkabouthowshemightapplythe80-20ruletoherblogproject.Shethought:Ispentagreatdealofmytime,technicalability,andwritingexpertisetobuildthisblog.Yetforallofthisexpendedenergy,Iamgettingverylittletraffictothesite. Sheknewthatevenifapieceofcontentisspectacular,itisworthvirtuallynothingifnoonereadsit.Carladeducedthatperhapshermarketingoftheblogwasagreaterproblemthantheblogitself. Application Toapplythe80-20rule,Carladecidedtoassignher"80%"toallthatwentintocreatingtheblog,includingitscontent;andasher"20%,"shedesignatedtheblog'svisitors. Usingwebanalytics,Carlafocusedcloselyontheblog'straffic.Sheasked: Whichsourcescomprisethetop20%oftraffictomyblog?Whoarethetop20%ofmyaudiencethatIwishtoreach?Whatarethecharacteristicsofthisaudienceasagroup?CanIaffordtoinvestmoremoneyandeffortintosatisfyingmytop-20%readers?Intermsofcontent,whichblogpostsconstitutethetop20%ofmybest-performingtopics?CanIimproveuponthosetopics,andgetevenmoretractionfrommycontentthanI'mgettingnow? Carlaanalyzedthesequestionsandeditedherblogaccordingly: Sheadjustedtheblog'sdesignandpersonatoalignwiththoseofhertop-20%targetaudience,astrategycommoninmicromarketing. Sherewrotesomecontenttomeethertargetreader'sneedsmorefully. Althoughheranalysisdidconfirmthattheblog'sbiggestproblemwasitsmarketing,Carladidnotignoreitscontent.Sherememberedthecommonfallacycitedinthearticle—if20%ofinputsaremostimportant,thentheother80%mustbeunimportant—anddidnotwanttomakethatmistake. Results Byapplyingthe80-20ruletoherblogproject,Carlaunderstoodheraudiencebetterandtargetedhertop-20%ofreadersmorepurposefully.Shereworkedtheblog'sstructureandcontentbasedonwhatshelearned,andtraffictohersiterosebymorethan220%. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. Econlib."VilfredoPareto." SixSigmaDaily."RememberingJosephJuranandHisLastingImpactonQuality." CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedTerms ParetoPrincipleDefinition TheParetoPrinciplespecifiesthat80%ofconsequencescomefrom20%ofthecauses,assertinganunequalrelationshipbetweeninputsandoutputs. more HowParetoAnalysisandthe80/20RuleWork Paretoanalysisstatesthat80%ofaproject'sresultsaredueto20%ofthework,orconversely,80%ofproblemscanbetracedto20%ofthecauses. more PerformanceManagementDefinition Performancemanagementisacorporatemanagementtoolthathelpsmanagerstomonitorandevaluateemployees'work. more WhoIsPaulKrugman? KrugmanisaU.S.economist,knownforhisworkininternationaltradetheoryandtheresurgenceofKeynesianeconomicsaftertheGreatRecession. more WhatIsWelfareEconomics? Welfareeconomicsfocusesonfindingtheoptimalallocationofeconomicresources,goods,andincometobestimprovetheoverallgoodofsociety. more WhatIsViralMarketing? ViralmarketingseekstospreadinformationaboutaproductorservicefrompersontopersonbywordofmouthorsharingviatheInternetoremail. more PartnerLinks RelatedArticles PodcastEpisodes TheLegendofJackBogle,andtheFutureofETFs PodcastEpisodes KeepingitRealwithRealVision'sRaoulPal Economics Real-LifeExamplesofthe80-20Rule(ParetoPrinciple)inPractice FinancialLiteracy 10TikTokInfluencerstoKnow Careers FamousBlackFinancialAdvisors Careers IstheCMADesignationWorthIt?