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Understanding the Pareto Principle

The relationship between cause and effect isn’t always cut and dry. In many cases, the balance between inputs and outputs is unequal. This inequality is the foundation of the Pareto Principle, also called the 80/20 rule in economic theory. Here’s a closer look at what the Pareto rule means in economics, as well as how it’s used in real life.

What is the Pareto Principle?

Also called the Pareto law or Pareto rule, the Pareto Principle was named for Italian economist Vilfredo Pareto. It was originally used by Pareto to observe the relationship between Italian land ownership and population size. He noted that 20% of Italy’s population owned 80% of its land, and that the same distribution between land ownership and population seemed to hold true in other countries as well.

At its core, the Pareto Principle is about uneven distribution. Applied to economics, it states that the relationship between causes and effects – or inputs and outputs – isn’t balanced. Instead, these relationships typically break down the following theory: 80% of consequences stem from 20% of causes.

Today, the Pareto Principle is applied across a wide range of industries and business applications, from project management to human resources. It’s perhaps most frequently applied to time management, with the theory that 20% of time spent at work is responsible for 80% of output.

Pareto rule examples

Here are a few more examples of the Pareto Principle in real life:

  • 20% of customers generate 80% of complaints

  • 20% of investors provide 80% of company funding

  • 20% of social media content provide 80% of click-throughs to website

  • 20% of product features cause 80% of product usage

  • 20% of bugs cause 80% of product crashes

How to use the Pareto Principle

Whatever its application, the reason why a Pareto chart is enduringly popular is that it can be useful in identifying the most productive inputs for any situation. For example, if 20% of your business’s clients produce 80% of your business revenue, you should focus your efforts on retaining those particular clients. You could allocate 80% of your customer service efforts to suit those 20% of high-value clients. A second example would be focusing on rewarding the 20% of employees that contribute 80% of revenue or results for your business.

However, this is not to say that the remaining 80% of lower-value customers or lower-producing employees should be ignored. Instead, distribute your company’s efforts with this proportion in mind. The Pareto rule isn’t a strict mathematical law. It’s merely a guidepost for identifying the most important assets or inputs.

Advantages of the Pareto Principle

The main benefit of the Pareto Principle is that it gives you a better idea of where to focus your time and resources. Whether this is fixing a fault that’s causing 80% of your problems or cutting out administrative tasks that waste 80% of your time, using a Pareto chart breaks down time, effort, and cost for improved productivity. By looking at Pareto distribution, you can identify the main relationships between inputs and outputs. This allows you to allocate your business resources to scale more efficiently.

Limitations of the Pareto Principle

The primary downside of the Pareto Principle occurs when you take it too literally. The 80/20 rule is meant to be a general observation, rather than a strict law. For example, it might be the case that 35% of your workforce is generating 55% of its output, rather than 20% and 80%. A Pareto distribution doesn’t always break down so neatly, or even add up to 100.

It’s also important not to focus on top-performing demographics to the point of ignoring the remainder. You might choose to reward the highest-performing team members, but don’t neglect the remaining 80%. Instead, identify which characteristics make certain workers more productive than others, and use this information to drive the full team forward. Ideally, you’ll use the 80/20 rule to increase the percentage of high performers.

Overall, the Pareto law is a useful analytical tool when breaking down relationships between causes and their outcomes. It’s helpful in many areas of a business but should be used as guidance rather than hard facts.

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