The 80-20 rule – nonchalantly mentioned, most often misunderstood, greatly overused and lacking the credit it deserves, in my opinion, as one of the laws of the universe.
The 80-20 rule is also known as the Pareto principle, the principle of factor sparsity and the law of the vital few. A business consultant by the name of Joseph Juran named the 80-20 rule after an Italian economist Vilfredo Pareto. Pareto was the guy that publicized the fact that 80% of the land in Italy was owned by 20% of the population. Pareto must have been a fanatic because he also observed and stated that 80% of the peas he harvested from his garden came from only 20% of the pea pods. Pareto continued his research outside of his garden and found that this 80-20 stuff appeared to be pretty much universal.
Because of the big deal Pareto made of his studies, and because others found similar ratios wherever they looked, The Pareto principal became famous and passed around quite a bit. Also, since it had a rather uppity name, the Pareto principal, it could be mentioned without shame by upper class society and in the halls of education. Thankfully, it also had this catchy little nickname, the 80-20 rule, popular with the lowly 80% like me. That’s what I call it, the 80-20 rule, and you probably do too.
The 80-20 rule is not always dead on. For instance, the top 20% of the ten wealthiest people in the world only own about 50% of the world’s wealth. That’s a long ways from owing 80% but still not too shabby. Now, where is the 80-20 rule pretty much dead on? Let’s take a look at something all of us here know something about, business:
- 80% of a company’s profits come from 20% of its customers
- 80% of a company’s complaints come from 20% of its customers
- 80% of a company’s profits come from 20% of the time its staff spend
- 80% of a company’s sales come from 20% of its products
- 80% of a company’s sales are made by 20% of its sales staff
Other areas in which the 80-20 rule is recognized and used are numerous:
- Tim Ferriss, author of The 4-Hour Workweek recommended business owners focus on the 20% of customers that make up 80% of a business’s income. He also stated that a business should refuse to do business with the 20% of customers that take up the majority of time, eat up your resources and cause you the most trouble. Surely you can find some words of wisdom in that.
- Criminology studies show that 80% of crimes are committed by 20% of the criminals. That sounds vaguely familiar too.
- Financial service company studies show that 20% or less of customers generate positive cash flow while the remaining 80% or so create a loss for the company.
- 20% of patients consume 80% of health care resources and …
- Studies of crowded environments such as incarcerated individuals show that 20% of the population control the other 80%.
I am looking for the 20%. The vital few. I have several follow up articles for you.