What Is the 80-20 Rule?
The 80-20 rule, also known as the Pareto Principle, states that 80% of outcomes arise from 20% of inputs. The idea is applied in business and economics to identify and prioritize the most productive or problematic inputs to maximize value or minimize cost.
How Does the 80-20 Rule Work?
While the 80-20 rule is widely used in many different fields, from economics to personal finance, it is important to understand that the 80-20 rule is not a scientific or mathematical law—but rather a concept.
80-20 Rule in Management
In managing others, it means that recognizing and then focusing on the most impactful 20% of workers is the fundamental factor in making the most effective use of your time. Using this principle, if 20% of your staff give you 80% of the work you need, focus on them as they are your core group of impact.
80-20 Rule in Marketing
Putting the 80-20 rule into effect in marketing is about prioritizing focus. Using this principle, 80% of profits are generated from 20% of customers, 80% of product sales stem from 20% of products, and 80% of sales derive from 20% of advertising. This can help guide your use of marketing, advertising, and customer service resources.
80-20 Rule in Relationships
Just like in business, the best way to apply the 80-20 rule in relationships is to identify 20% of the obstacles and work on them. Once they are resolved, it will soothe the majority of the relationship issues.
Example of the 80-20 Rule
Examples can be found in many aspects of business.
In a production process, the 80-20 rule would mean that 80% of the output comes from 20% of the input. In a management setting, it may be that 80% of productivity comes from 20% of employees. In customer service, it may be that 80% of the negative customer feedback stem from 20% of the customers.
Is the 80-20 Rule the Same as the Pareto Principle?
The 80-20 rule and the Pareto principle are the same, and the terms are used interchangeably.
History of the 80-20 Rule
The 80-20 rule was first discussed by economist Vilfredo Pareto to describe Italian wealth distribution in the early 1900’s, showing that 80% of the wealth in Italy was controlled by 20% of the population.
In 1940, Dr. Joseph Juran applied the 80-20 rule to quality control. He postulated that 80% of product issues were caused by 20% of the production problems. Researchers in many fields have applied the 80-20 rule to explain phenomena in business, economics, and other areas of human behavior.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Each week, one of our investing experts answers a reader's question in our InvestingAnswers' Q&A column. It's all part of our...Read More →