Understanding the Pareto Principle - The 80/20 Rule

The Pareto Principle originally referred to the observation that 80% of Italy’s wealth belonged to only 20% of the population.

Today, the Pareto Principle is the observation (not law) that most things in life are not distributed evenly. It is often used to quote the following:

• 20% of the input creates 80% of the result
• 20% of the employees produce 80% of the result
• 20% of the customers create 80% of the revenue
• 20% of the bugs cause 80% of the crashes
• 20% of the features cause 80% of the usage

While management must always be aware of this concept to ensure effort is placed in that highest rewarding 20% area we must also realize that we often think these two numbers (typically 20 and 80) must add to 100 when this is not actually the case.

Most people are surprised by this but when we think about it, it becomes obvious. Twenty percent of the employees could create 10% of all results, or 50%, or 80% or 99%, or even 100%. Remember that the 80/20 rule is a rough guide about typical distributions. The numbers don’t have to be “20%” and “80%” exactly. The key point of the 80/20 rule is that most things in life (effort, reward, output) are not distributed evenly, some contribute more than others.

The Pareto Principle helps you realize that the majority of results come from a minority of inputs. With this in mind, it is important for management to know and act as follows:

• Know: 20% of employees contribute 80% of results - Act: Reward those employees.
• Know: 20% of bugs contribute 80% of crashes - Act: Fix these bugs first.
• Know: 20% of customers contribute 80% of revenue - Act: Satisfy those customers.

The key point of Pareto is to realize that you can often concentrate effort on the 20% that makes a difference, instead of the 80% that doesn’t add much.

In economics terms, there is diminishing marginal benefit. This is related to the law of diminishing returns: each additional hour of effort returns a diminishing reward. By the end, you are spending lots of time on the minor details.

In conclusion, I use the Pareto Principe to hone in on value but I also realize not to be strict on the percentages. I may focus on 5% or 50% depending on the return on my investment.