The 80-20 Rule (Pareto Principle) Explained

Do you consider enhancing your organization’s management system to derive the best result? Do you want to create a network of people who can serve as potential customers? Do you have a top-notch quality product but suffer from low sales? Want to know what can solve your problem? This blog will give you a pathway to success in the shape of a simple and flexible rule which is famously known as the Pareto Principle, and in management, we call it the 80/20 Rule.

What is the 80/20 Rule?

According to Vilfredo Pareto, 80% of the outcomes come from 20% of the causes. From this statement, we can derive that if we only focus on 20%, which is the Key Area of Concern, we can derive up to 80% of the result. To make it easier for you, 20% of the output is produced by 80% of the input if facilitated correctly.

In the corporate world, to derive the maximum results, you need to find your Key Area of Concern (KAC) and work on it; this alone will derive a top result for you, and you can observe growth in your organization. It is often observed in business that if we try to attract new customers and ignore those we already have, we will lose our customer base because we cannot apply the 80/20 Rule.

If we had put 80% focus on retaining the customer and 20% on bringing new customers, we would have marketed our product in a much better way and with fewer resources. It would not only give us a better result but also ensure our optimum utilization of resources.

The Base of 80/20 Rule

An organization must put great effort into identifying and working on its best assets to not only derive the best results but also ensure the optimum utilization of resources. The base of the rule is built on the thought to identify and utilize the best out of all. This is not necessary that the best will be 20% only, and this is also not necessary that it will only derive 80% of results. Still, one sure thing is that it will ensure the achievement of results in whatever ratio it gives.

The 80/20 Rule is interpreted in economic terms. However, it is pervasive and can be used dynamically in various fields. Whether it is management or your expenses that you need to control, you will certainly enhance the results if you comprehend the rules and apply them in your work.

Benefits of Using the Pareto Principle 

There is more than one benefit of using the 80/20 Rule. It enhances productivity and profitability and helps you prioritize your tasks, resources, and efforts. It gives you a more centralized approach to complete your operation cycle and achieve the organizational goals at optimum utilization of resources. The 80/20 Rule is a fundamental principle that can guide you on how to distribute your resources and efforts to more on what is contributing to your success and less on what has the potential but is not yielding the same result due to any reason, thus ensuring your better performance. 

Using Pareto Principle in Different Fields

The 80/20 Rule is pervasive. It means that it can be used in different fields to solve dynamic problems and guide success and management. Let’s discuss the utility of the 80/20 Rule in different aspects: 

1. Time Management 

The 80/20 Rule can help you in better time management. Applying the principle in this aspect says that 20% of your efforts lead to 80% of the result you produce, only if you put it right. You need to focus and channel your energy to that 20% of the task completed to attain the best out of it. For example, channel your maximum energy to your art and other things if you are an artist. 

2. Business

Many great business personalities follow the 80/20 Rule, which says that 20% of your best inputs produce 80% of the output. You should focus on that to generate more extraordinary results at a minimum cost.

3. Relationships

Surprisingly, you can even use the 80/20 Rule for maintaining a healthy relationship. the 80/20 Rule states that you can only fulfill 80% of your needs through a relationship, whether we talk about love or attention, while the rest 20% you have to give it to yourself. This is because no one can love you as you want or you do to others. People are different in their ways of showing love; only you can love yourself fully and completely. 

4. Problem-Solving

The 80/20 Rule says that to solve a problem, spend 80% of the time observing, listening, or researching to form a better understanding, and your efforts will automatically reduce to 20%.

5. Education

Majorly in exams, professors apply the 80/20 Rule. They make the question paper only through 20% of the content given to you for learning. It is essential to identify the important concepts and put 80% of the focus on them to yield the best result.

Misconceptions Around the Pareto Principle (The 80-20 Rule): 

There are many misconceptions and misinterpretations of the 80/20 Rule, which people should clarify to apply the principle correctly and precisely. It is flexible and not a universal truth that must be true in every situation. It can become a tool to help you build your success route, but it can never develop your success route itself.

People also think that if we regard 20% of the output as significant for the overall result we are about to get by focusing our attention on it, then 80% of the work is left as waste, but the truth is not. Here when we are saying that 20% of the significant output, we mean the part of the total output which is most important; this doesn’t mean the rest of the production is not adequate. The rest of the output is also very significant but not more than that 20%.

If the 20% is set correctly, everything else will also fall right into place with just a little effort, and you will be able to derive the best.

How You Can Use the 80/20 Rule?

Let’s understand the rule in a better way by exploring a hypothetical problem;

Jayden owns a clothing brand that produces clothes for all genders and ages, which shows that he still needs to segment his business and discover his category. After a year of sales, he marked out the following observations:

• Clothes from the women’s section readily get stocked out. It happened thrice a year; he wasn’t prepared for so many sales and did not have enough resources to fulfill the demand. Hence, he incurred a loss of the profit he may have earned if he had speculated it right.
• Clothes from the men’s section didn’t get much attention, for the first quarter the sales were moderate, and then they dropped significantly for the rest resulting in extra production and loss. 
• Clothes from the kids’ sections were not demanded much.
• Clothes from the old age section were not demanded at all.

With so much loss incurred in the last year, Jayden decided to introspect and find a way to escape this situation. Luckily, he already knew the 80/20 Rule and applied that to come up with an effective solution.

Solution:

By applying the 80/20 Rule, he came up with the following solution:

• He found out that out of all five sections, which were Young Male/Female, Old Male/Female, and small kids, he could derive the maximum result from Young Female clothing, which was just 20% of all the production. 
• He decided to pay the maximum attention to it. He poured 80% effort into 20% of the production and raised it significantly. He also focused on the Young Male’s section as he was able to derive some results from it also. This time he stopped producing for old age and kids because he thought that for the time being, until the brand grows, he needs to work on these two key areas.

Result

In the next year, by applying the 80/20 Rule as a tool to create strategies to maximize sales and control production, Jayden was able to raise revenue significantly. He also focused on the marketing part, which helped uplift the sales of men’s clothing substantially. Further, he was able to save resources to spend on creating his reach on different social media platforms.

Wrapping Up:

The 80/20 Rule is a valuable tool that leaders can learn to maximize the value they create for the organization. The principle focuses on creating the best out of the best. It centralizes your efforts on the things that can provide you success and makes you aware of the loopholes. It also tells us that you can derive a more significant value if you transfer your focus toward the small but significant thing. It would be best if you also understood that a desire to control everything leaves you with nothing.

Frequently Asked Questions

Ques 1. How to use the 80/20 rule in investment?

Ans. Consider investing 20% of the stocks in the S&P 500 that eventually contributed 80% of the market’s returns. However, the past performance will not effect the future result but yes things will take a better turn. 

Ques 2. What are the advantages of using the Pareto Principle?

Ans. Here are the benefits of the Pareto Principle:

• Increased productivity
• Career development
• Time management
• Revenue identification
• customer relations
• Focused Strategies

Ques 3. What are the productive ways to use the Pareto Principle?

Ans. First, prioritize your task with the 80/20 rule i,e; start with the important 20% of your work day complete the important task, and switch according to the remaining 80% task and complete it by not wasting your productive time.

Ques 4. How Pareto Principle help in improving quality?

Ans. Here are the ways in which the Pareto Principle helps in improving the quality of a process:

• It helps in analyzing the frequency of problems
• Helps in focusing on significant issues and telling their causes 
• Help in the analysis of bigger reasons by examining the individual sections