Examples of the 80-20 Rule (Pareto Principle) in Practice (2024)

The 80-20 rule, also known as the Pareto Principle, states that 80% of all outcomes result from 20% of all causes. In business, this means seeking the most productive inputs that will generate the highest outcomes/returns. There are a number of practical applications for the 80-20 rule in diverse areas such as the distribution of wealth in economics, quality production control, business sales, and growth.

Key Takeaways

  • The 80-20 rule, also known as the Pareto Principle, states that 80% of all outcomes (output) derive from 20% of all causes (inputs).
  • The Pareto Principle was created by economist Vilfredo Pareto in Italy in 1906.
  • The rule has far-reaching applications, including in quality production, the distribution of wealth, business, investing, and project management.
  • In business, the principle asserts that 80% of a company's revenues should come from 20% of its customers.

Origins of the Pareto Principle

The 80-20 rule was invented by Vilfredo Pareto in Italy in 1906. According to legend,Pareto, an economist, noticed20% of the pea pods in his garden provided80% of the peas. He then determined20% of the population in Italy owned 80% of the land. The use of the80-20 rulehas since expanded beyond the alleged humble beginnings in Pareto’s garden.

Dr. Joseph Juran applied the 80-20 rule to quality control in the 1940s. He found that 80% of problems with products were caused by 20% of the production defects. By focusing on and reducing that20% of production defects, overall quality could be increased. Juran became an important figure in Japan after lecturing there extensively on quality control issues. His main phrase was, "thevital few andthe trivial many."

Managers at companies should identify the factors that are the most important to the company's success and give those factors the most attention.

The 80-20 Rule in Business and Investments

The 80-20 rule has found applications in business management. For business sales, 20% of a company’s repeat customers should be responsible for 80% of the sales. Also, 20% of the employees are responsible for 80% of the results.

For project management, the first 20% of the effort put in on a project should yield 80% of the project’s results. Thus, the 80-20 rule can help managers and business owners focus 80% of their time on the 20% of the business yieldingthe greatest results.

In investing, the80-20 rulegenerally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio’s growth. On the flip side, 20% of a portfolio’s holdings could be responsible for 80% of itslosses.

Another method is to attempt to focus a portfolio on the 20% of stocks in the broader market that comprises 80% of the market’s returns; however, due to the uncertainty of future returns, both of these methods are difficult to put into practice. Stocks are inherentlyrisky assetsdue to the unpredictability of future performance.

One method for using the80-20rule in portfolio construction is to place 80% of the portfolio assets in a lessvolatileinvestment, such as Treasury bonds or index funds while placing the other 20% in growth stocks. The 80% in the lower-risk investment will collect a reasonable return, while the 20% in the higher-risk assets will hopefully achieve greater growth.

What Is an Example of the 80-20 Rule?

An example of the 80-20 rule is 80% of a company's revenues coming from 20% of its customers or 20% of a portfolio's most risky assets generating 80% of its returns.

How Do You Set Goals With the 80-20 Rule?

To set goals with the 80-20 rule, you primarily establish that 20% of your efforts/tasks will result in 80% of your results. For example, at work, 20% of the effort you put into your job will result in 80% of your tasks being completed/successful.

What Is the 80-20 Rule for CEOs?

CEOs can use the 80-20 rule by determining the 20% of tasks that need to be prioritized and done themself while delegating 80% of the tasks to their subordinates. This allows a CEO to effectively manage their responsibilities and be productive.

The Bottom Line

The 80-20 rule (Pareto Principle) has many applications that allow companies and investors to make the most efficient decisions. For example, a company would look to 20% of its customers generating 80% of its revenues. The same thought process can be applied to risk and reward in an investment portfolio. Overall, the application of the 80-20 rule helps to maximize efficiency.

Examples of the 80-20 Rule (Pareto Principle) in Practice (2024)

FAQs

Examples of the 80-20 Rule (Pareto Principle) in Practice? ›

The 80/20 rule is not a formal mathematical equation, but more a generalized phenomenon that can be observed in economics, business, time management, and even sports. General examples of the Pareto principle: 20% of a plant contains 80% of the fruit. 80% of a company's profits come from 20% of customers.

What is the 80-20 rule with practical examples? ›

The 80/20 rule is not a formal mathematical equation, but more a generalized phenomenon that can be observed in economics, business, time management, and even sports. General examples of the Pareto principle: 20% of a plant contains 80% of the fruit. 80% of a company's profits come from 20% of customers.

What is a practical example of the Pareto Principle? ›

For business sales, 20% of a company's repeat customers should be responsible for 80% of the sales. Also, 20% of the employees are responsible for 80% of the results. For project management, the first 20% of the effort put in on a project should yield 80% of the project's results.

Which of the following is an example of the Pareto Principle? ›

Here are a few examples of the Pareto principle in action: 20 percent of employees produce 80 percent of a company's results. 20 percent of a given employee's time yields 80 percent of their output. 20 percent of software bugs cause 80 percent of the software's failures.

How else would you apply the 80-20 rule at work? ›

This can be applied in many different aspects of your life including your work. For example, if 20% of your tasks are bringing 80% of your project results, you can consider making those specific tasks your priority. You can also keep in mind the 80% you can discard, rethink, or transfer to make your life easier.

What is the most productive way to apply the 80-20 rule? ›

Prioritize the first 20% of your workday regarding the tasks you complete and know when it's time to pivot and make changes when working on the remaining 80% to ensure you don't waste too much productive time and energy.

What is the 80-20 rule for dummies? ›

This rule suggests that 80% of effects come from 20% of causes. For example, 80% of a company's revenue may come from 20% of its customers, or 80% of a person's productivity may come from 20% of their work. This principle can be applied to many areas, including productivity for small business owners.

What is a simple example of Pareto analysis? ›

The Pareto Principle illustrates the lack of symmetry that often occurs between the work you put in and the results you achieve. For example, you might find that 13 percent of work could generate 87 percent of returns. Or that 70 percent of problems could be resolved by dealing with 30 percent of underlying causes.

What is the 80-20 rule in relationships? ›

But can the law of attraction be boiled down to a formula? The 80/20 relationship theory states that you can only get about 80% of your wants and needs from a healthy relationship, while the remaining 20% you need to provide for yourself.

What are the applications of Pareto principle? ›

Practical Applications

The Pareto principle can be seen across many sectors of business and within consumerism. Below are a few examples of where it might be found: 80% of the work in a group project is done by 20% of the group. 80% of revenues come from 20% of the products.

What is the 80-20 rule in private equity? ›

80% of your returns will usually come from 20% of your investments. 20% of your investors will usually represent 80% of the capital. For portfolio companies. 20% of your customers will usually represent 80% of your profits.

Which of the following is the Pareto Principle quizlet? ›

Which of the following best describes the Pareto principle? It is the concept stating that 80% of the problem is caused by 20% of the contributing root causes.

What is the Pareto Principle in Quizlet? ›

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. From a business vantage, "80% of your sales come from 20% of your clients".

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