What is the 80/20 Rule?
One of the things you’ll hear about quite often in the business world, particularly if you’re in management, is the 80/20 rule. The 80/20 rule, also known as the Pareto Principle, was first proposed by management consultant Joseph M. Juran and says that roughly 80% of any given outcome is caused by 20% of the causes. This might sound a little complicated right now, but it’ll make sense soon. Juran called this the Pareto Principle after Italian economist Vilfredo Pareto, who noticed that 80% of the land in Italy was owned by 20% of the population. Pareto himself got the idea to study that correlation when he noticed that 80% of the peas his garden produced came from only 20% of the pea pods he had planted.
Let’s look at how this rule applies to everyday business concerns. If you were to look at your sales opportunities, you would likely find that roughly 80% of them came from only about 20% of your customer base. You may also find that 20% of your sales force accounts for nearly 80% of all sales made, or that 20% of your products or services account for 80% of what got sold. Of course, the 80/20 ratio won’t always hold true exactly, but the overall trend of “a small portion of causes accounts for a large portion of outcomes” will still generally hold true.
The reason the 80/20 rule is so popular with managers is because it allows you to see where you can most efficiently allocate resources. If 80% of sales come from 20% of your total catalog, you should push those items more aggressively and think about cutting some of the others. If 80% of sales are coming from 20% of your staff, you may need to downsize or at the least retrain your employees. Using the 80/20 rule lets you focus on succeeding in the big picture, instead of trying to micromanage every little detail.