In business, the goal of the 80-20 rule is to identify and prioritize those inputs that are likely to be the most productive. For example, once managers identify factors that are critical to a company's success, they should focus the most attention on those factors.

Although the 80-20 rule is often used in business and economics, you can apply this concept to any field. Wealth distribution, personal finance, spending habits, and even infidelity in personal relationships can all be subjects of the 80-20 rule.

Key Points

• The 80-20 rule states that 80% of results come from 20% of the causes.
• The 80-20 rule prioritizes the 20% of factors that produce the best results.
• A tenet of the 80-20 rule is to identify an entity's best assets and use them effectively to create maximum value.
• This rule is a guideline, not a hard mathematical law.
• People sometimes mistakenly conclude that if 20% of factors should be prioritized, then the other 80% can be ignored.

How does the 80-20 rule work?

You can think of the 80-20 rule as simple cause and effect: 80% of the results (outputs) come from 20% of the causes (inputs). This rule is often used to state that 80% of a company's revenue is generated by 20% of its customers.

From this perspective, it may be advantageous for a company to focus on those 20% of customers that contribute 80% of revenue and market specifically to them. By doing this, the company can retain these customers and acquire new customers with similar characteristics. However, the 80-20 rule has a more fundamental meaning.

At its core, the 80-20 rule is about identifying an entity’s best assets and leveraging them effectively to create maximum value. For example, students should try to determine which parts of the textbook will be of greatest benefit on an upcoming exam and focus on those parts first. However, this does not mean that students should ignore other parts of the textbook.

People may not realize that the 80-20 rule is a guideline, not a hard mathematical law. Additionally, percentages do not necessarily have to equal 100%. Inputs and outputs simply represent different units. These unit percentages do not necessarily add up to 100%. What matters is the concept behind the rules.

There is another way to misunderstand the 80-20 rule. In other words, if 20% of the inputs are the most important, then the other 80% of the inputs must not be important. This is a logical fallacy. Even if you decide to prioritize 20% of your inputs, 80% of your inputs may still be important.

IMPORTANT: Business managers across all industries use the 80-20 rule to help narrow their focus and identify those factors that are causing the biggest problems in their departments and organizations.

Background on the 80-20 Rule

The 80-20 rule is also known as the Pareto principle and is used in Pareto analysis. It was originally used in macroeconomics to describe the distribution of wealth in Italy at the beginning of the 20th century. It was proposed in 1906 by Italian economist Vilfredo Pareto, who is best known for the concept of Pareto efficiency. [1]

Pareto noticed that 20% of the pea pods in his garden contributed 80% of the peas. Pareto extended this principle to macroeconomics, showing that 80% of Italy's wealth was owned by 20% of the population.

In the 1940s, Dr. Joseph Juran, a luminary in the field of operations management, applied the 80-20 rule to quality control in commercial production.

He demonstrated that 80% of product defects are caused by 20% of problems in production methods. By focusing on and reducing 20% ​​of production issues, companies can improve the overall quality of their products. Juran calls this phenomenon "the critical minority and the trivial majority." [2]

Benefits of the 80-20 Rule

While there is little scientific analysis to prove or disprove the effectiveness of the 80-20 rule, there is plenty of anecdotal evidence to support that the rule is inherently effective, even if numerically inaccurate.

Performance results from salespeople in a variety of industries demonstrate success by employing the 80-20 rule. Additionally, outside consultants using Six Sigma and other management strategies have incorporated the 80-20 principle into their practices with good results.

Examples of the 80-20 Rule

Carla, a graduate student at Harvard University, is working on an assignment for her digital communications course. The purpose of this project is to create a blog and monitor its success over a semester.

Kara designed, created and launched the website. At the middle of the semester, the professor evaluated the blog. Kara's blog, while gaining some visibility, generated the least traffic compared to her classmates' blogs.

Kara came across an article about the 80-20 rule. The article says you can use this concept in any field. So Kara started thinking about how she could apply the 80-20 rule to her blogging project. She thought, "I've spent a lot of time, technical skills, and writing expertise building this blog. Yet, despite all that effort, I'm getting very little traffic to the site."

She now understands that even if a piece of content is great, it's almost worthless if no one reads it. Kara reasoned that perhaps her marketing of the blog was a bigger problem than the blog itself.

To apply the 80-20 rule, Kara decided to allocate 80% of her efforts to all the work involved in creating the blog, including its content. 20% of her will be represented by the choices of blog visitors.

Using web analytics, Kara keeps a close eye on her blog's traffic. she asked herself:

• What sources make up the top 20% of my blog’s traffic?
• Who are the top 20% of the audience I want to reach?
• What are the characteristics of this audience as a group?
• Can I afford to invest more money and effort into satisfying the top 20% of my readers?
• Which blog posts make up the top 20% of my top-performing topics in terms of content?
• Can I improve these themes and get more traction from my content than I do now?

Kara analyzed the answers to these questions and edited her blog accordingly:

It’s worth noting that while her analysis did confirm that the blog’s biggest problem was its marketing, Kara didn’t ignore its content. She remembered the common fallacy cited in the articleif 20 percent of the inputs mattered, then the other 80 percent must notand didn’t want to make that mistake. She knew it was necessary to address every aspect of the content.

By applying the 80-20 rule to her blogging project, Kara gained a better understanding of her audience and therefore more purposefully targeted the top 20% of her readers. She redesigned the structure and content of her blog based on what she learned, and traffic to her site increased by over 220%.

What is the 80-20 rule?

The 80-20 rule is a principle that states that 80% of results come from 20% of causes. It is used to identify the factors most responsible for success (usually in a business setting) and then focus on those factors to improve results. This rule can also be applied outside of the business world.

What does the 80-20 rule mean?

At its core, the 80-20 rule simply emphasizes the importance of investing your energy into those aspects of your businessor life, sports, music gigs, blogging, etc.that will give you the best results. However, that doesn't mean one should ignore areas that are less successful. It’s about prioritizing priorities and tasks, and then solving the problems exposed by that focus.

How do I invest using the 80-20 rule?

When building your portfolio, you might consider investing in the 20% of stocks in the S&P 500 that contribute 80% of the market's returns. Or you could create an 80-20 allocation: 80% of your investments could be in lower-risk index funds, while 20% could be in growth funds. Of course, past performance does not necessarily correlate with future results. Therefore, it is important to monitor the performance of your portfolio to see if the results match your intentions and goals.

References

[1] Econlib. "Vilfredo Pareto."

[2] Six Sigma Daily. "Remembering Joseph Juran and His Lasting Impact on Quality."

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