Martha Kendall Custard
Martha Kendall Custard is a former freelance writer for G2. She creates specialized, industry specific content for SaaS and software companies. When she isn't freelance writing for various organizations, she is working on her middle grade WIP or playing with her two kitties, Verbena and Baby Cat.
What is the Pareto Principle?
The Pareto Principle, also known as the 80/20 rule, states that 80% of consequences result from 20% of causes, meaning there is an unequal relationship between input and output.
The idea was named after economist Vilfredo Pareto and was derived from the imbalance of land ownership in Italy. Today, it is applied in business across a variety of industries. For example, 20% of a company’s employees could be driving 80% of the profits.
The idea is most applicable to client-service-based businesses and has been adopted by project management software. The principle is also applied in a personal development context. For instance, 80% of work-related output could result from only 20% of a person’s time spent working.
Benefits of the Pareto Principle
The Pareto Principle helps individuals and organizations identify which actions account for the most results. The principle is beneficial because it:
- Shows who to reward. If 20% of employees drive 80% of the organization’s profit, the 20% deserves to be rewarded and compensated accordingly.
- Reveals areas for improvement. Identifying the 80% of business operations that only drive 20% of results can help organizations pinpoint which operations or departments to overhaul.
- Optimizes resource allocation. Discovering the 20% of performing operations shows the organization where budget increases could drive even more profit.
- Creates maximum value. Organizations and individuals use the 80/20 rule to prioritize their actions to get the full benefit, no matter what they are doing.
Pareto Principle basic applications
The Pareto Principle can be used in almost any scenario. The most common business examples fall into the following categories:
- Productivity: The rule can be used to prioritize which tasks need to be done first. Individuals should tackle the most impactful 20% of tasks before moving on to the other 80% of important, but less impactful, items on their to-do list.
- Decision making: When solving problems, teams can first identify the causes of the challenges, categorize them into small groups, mark how each group impacts the business, then focus on the group of problems that affect the company the most.
- Quality control: The Pareto Principle is commonly used within the Six Sigma quality control methodology to help people visualize data and prioritize actions. The methodology, a common system of operations management, reduces the amount of variation in a process to increase production. The 80/20 rule identifies which variations are impacting the process the most.
Pareto Principle best practices
While the Pareto Principle is a common observation, it isn’t a proven mathematical rule. Best practices for this rule are to remember the following caveats:
- Observation, not law. While the Pareto Principle is true in many cases, it isn’t always accurate. Knowing that it's not a law, organizations can simply use it as a guideline to identify the actions and people driving the most profit. This percentage could be higher than 20%, depending on the circumstances.
- Remember the other 80%. Even when 80% of profit comes from 20% of actions, the remaining 80% of actions are still important. Resources can be reallocated according to ROI, but that doesn’t mean the other 80% of actions should be eliminated from the organization. After all, the most effective 20% are often supported by the other 80%.
