One of the most important rules in business is the 80-20 rule, also called the ‘Pareto Principle’. It’s really simple yet surprisingly applicable.
The Pareto Principle
The Pareto principle (also known as the 80–20 rule, the law of the vital few, and the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes. It is a common rule of thumb in business; e.g., “80% of your sales come from 20% of your clients.” Mathematically, the 80–20 rule is roughly followed by a power law distribution (also known as a Pareto distribution) for a particular set of parameters, and many natural phenomena have been shown empirically to exhibit such a distribution. Businesswise this leaves us with a great advantage: Once identified we have easy access to dramatic improvements in profitability by focusing on the most effective areas and eliminating, ignoring, automating, delegating or retraining the rest, as appropriate.
Let’s look at a few examples in 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
- 80% of software errors are eliminated by fixing 20% of the most-reported bugs
- 80% of the website traffic occurs during 20% of the time
- 80% of software errors come from 20% of the code
- 80% of the work only take 20% of the time
Focus on the 20% that cause 80% of the effect. Eliminate, ignore, automate or delegate the 20% work that take up 80% of your time.
Freely cited from Wikipedia