Pareto's Principle: The 80-20 Rule
Vilfredo Pareto (1848-1923) was an
Italian economist who, in 1906, observed that twenty percent of the Italian
people owned eighty percent of their country's accumulated wealth. Over time
and through application in a variety of environments, this analytic has come to
be called Pareto's Principle, the 80-20 Rule, and the "Vital Few and
Trivial Many Rule." Called by whatever name, this mix of 80%-20% reminds
us that the relationship between input and output is not balanced. In a
management context, this rule of thumb is a useful heuristic that applies when
there is a question of effectiveness versus diminishing returns on effort,
expense, or time.
The Rule and Its Corollary
Pareto's rule states that a small number of causes is responsible for a large percentage of the effect, in a ratio of about 20:80. Expressed in a management context, 20% of a person's effort generates 80% of the person's results. The corollary to this is that 20% of one's results absorb 80% of one's resources or efforts. For the effective use of resources, the manager's challenge is to distinguish the right 20% from the trivial many.
Some examples about the allocation of time, effort, and resources are the following:
· Costs. To reduce costs, identify which 20% are using 80% of the resources. If members of this segment are not top profit generators, consider charging them for the resources they consume or shift services away from this sector.
· Personal Productivity. To maximize personal productivity, realize that 80% of one's time is spent on the trivial many activities. Analyze and identify which activities produce the most value to your company and then shift your focus so that you concentrate on the vital few (20%). What do you do with those that are left over? Either delegate them or discontinue doing them.
· Product Mix. Marketers and advertisers engage in market segmentation by identifying groups of people/organization with shared characteristics and then aggregate these groups into larger market segments. This segmentation may be behavioristic, demographic, geographic, or psychographic. The rule predicts that 80% of the profits are derived from 20% of the segments. If costs are allocated to segments and the segments are then rank-ordered by profit, overall profits will increase if the less profitable segments are discontinued, sold, or traded.
· Profits. To increase profits, focus attention on the vital few (top 20%) by first identifying and ranking customers in order of profits and then focusing sales activities on them. The 80-20 Rule predicts that 20% of the customers generate 80% of the revenues, and 20% yield 80% of the profits, but these two groups are not necessarily the same 20%.
More Examples of the 80-20 Rule:
80% of a manager's interruptions come from the same 20% of the people
80% of a problem can be solved by identifying the correct 20% of the issues
80% of advertising results come from 20% of your campaign.
80% of an equipment budget comes from 20% of the items
80% of an instructor's time is taken up by 20% of the students
80% of benefit comes from the first 20% of effort
80% of customer complains are about the same 20% of your projects, products, services.
80% of network traffic stays within the LAN while 20% needs to cross the backbone.
80% of our personal telephone calls are to 20% of the people in our address book
80% of our shipments utilize 20% of your inventory.
80% of sales time is spent on 20% of the customers, who may not be the profitable 20%
80% of the decisions made in meetings come from 20% of the meeting time
80% of the outfits we wear come from 20% of the clothes in our closets and drawers
80% of the traffic in town travels over 20% of the roads
80% of what we produce is generated during 20% of our working hours
80% of your annual sales come from 20% of your sales force
80% of your future business comes from 20% of your customers
80% of your growth comes from 20% of your products
80% of your innovation comes from 20% of your employees or customers
80% of your profits come from 20% of your customers
80% of your staff headaches come from 20% of our employees
80% of your success comes from 20% of your efforts
80% of your website traffic comes from 20% of your pages
From studying these examples of the 80-20 Rule, managers in both profit and not-for-profit enterprise can increase their effective and efficient use of resources by analyzing the inputs required to produce the outputs that they experience.
Final Thought: The 20-20-60 Rule
When I began my librarian career as an administrator in higher education, the dean to whom I reported told me that there was a rule of thumb that had served him well. It was the 20-20-60 Rule, a special case of 80-20 Rule that he applied to a wide variety of problems and situations. His rule was that 20% of most prospects are avid supporters and 20% are avidly not supporters. The persons in these two 20% tails are basically fixed and no amount of persuasion will change their view or attitude. Prospects in the remaining 60% are persons who are interested but need to be convinced or "sold." Application of the 20-20-60 Rule means that our outcome is best if we focus on the 60% group by answering their concerns, doubts, and questions. The persons in the 60% group are the ones who most likely will become our clients and customers
By Arthur W. Hafner, Ph.D.