Pareto’s Principle: The 80/20 Rule

In 1895, while studying the distribution of wealth in his country and every other country he studied, Italian economist Vilfredo Pareto observed something very interesting.

He discovered that eighty percent of all the land was owned by only twenty percent of the population.

Over time other people discovered corresponding distributions that applied to their own situations.
It was Dr. Joseph Juran, a professional quality management expert working in the US in the 1930s and 40s, who recognized a worldwide principle he called the “vital few and trivial many.”
Juran’s observation that only 20 percent of something is responsible for a massive 80 percent of the results became known as the 80/20 Rule, or Pareto’s Principle.

Pareto's Principle in Vineyards
Photo Credit: southtyrolean

Pareto’s Principle simply indicates that in any situation, only some (20 percent) are critical and many (80 percent) are insignificant.
In other words, the 80/20 rule means that the relationship between input and output is seldom, if ever, balanced.
In Pareto’s observations it meant 20 percent of the population possessed 80 percent of the land.
In Juran’s case it was the discovery that 80 percent of all problems were caused by 20 percent of manufacturing defects. You can apply Pareto’s Principle to almost anything.

It’s very likely that 20 percent of your staff and co-workers give you 80 percent of all the support you need. True advocates like them are rare, so don’t take these people for granted.

You probably read specialist literature and professional journals. I’ll reckon 80 percent of your knowledge concerning those topics comes from 20 percent of them.

The same applies to simple things like those jobs around the house that you’ve been planning to get around to doing? Pareto’s Principle implies that on your list of ten to-do items, only two will prove to be worth at least as much if not more than all the others put together.

Just to be clear: the 80/20 Rule really is a general rule of thumb, an estimate. Sometimes it might be 85/15 or even 90/10, sometimes 70/30. But the core of the concept is that a small quantity of something creates a vast majority of results.

And here’s another important manifestation of Pareto’s Principle: even the way you spend your time falls within the scope of the 80/20 Rule. Have you ever observed that 80 percent of your success is generated by 20 percent of your endeavors? Or, to put it in reverse, 80 percent of your efforts only causes 20 percent of your success.

Recognize that?

This means that you are in the undesired situation of the 80 percent segment, if

  • You’re doing a lot of prep work that’s setting you up for the “real” work.
  • Tasks are taking much longer than you thought they would.
  • You’re working on tasks that aren’t in your area of expertise.
  • You’re frequently putting out fires and working on “urgent” tasks.
  • You’re spending time on tasks other people want you to do, but you get little or nothing in return.
  • You’re not happy, you’re complaining, or you don’t feel a sense of accomplishment upon completion of your tasks.

However, you’re in the most desirable situation of the 20 percent segment of your efforts if…

  • You’re concentrating on tasks that help to boost your purpose and achieve your goals.
  • For tasks outside your area of expertise or ones you prefer not to do, you’re outsourcing or hiring people.
  • You’re completing tasks quickly, particularly the “core” work that needs to be done.
  • You’re limiting yourself to doing things you love and feel good about.
  • As an exception, you may be accomplishing tasks you don’t like, but you’re doing them anyway, realizing they add to the bigger picture.
  • You’re happy, grinning, and you experience a deep sense of achievement upon completion of your tasks.

So where does the Pareto Principle come in into your marketing funnel system?

Well, you probably have discovered that 80 percent of your revenue is generated by 20 percent of your clients. If that’s not the case, chances are that you neglect a lot of moneymaking opportunities. Let me explain.

If your clients add to your revenues on a one-to-one ratio (1:1), it implies that your business model concentrates on making a single sale and clients may never buy from you again. One opportunity. One sale. End of the story. Back to the start to catch the next client…

But if your business marketing system is equipped to continue to sell to them, over and over again, you’ll discover in the end that there are some clients who will buy more frequently and spend more cash with you over the long run than others.
Of course some will still buy once and never return. That’s all right. No matter what system you have in place, that’s going to happen anyway.

But your marketing system will play a major role in ascertaining what those top “20 percenters” will spend with you in the end. Or even whether you have a top 20 percent to begin with.

These folks are your “A” customers and they need to be treated as such. Like royalty. Exactly like the 20 percent of your colleagues and staff who are your true advocates, your “A” customers are your company’s true advocates. The way they show their loyalty to you is by frequently buying from you and by referring others to your business.

So the online business marketing system you want to use should include a process towards supporting your clients to:

  • Purchase more often.
  • Graduate towards making bigger ticket purchases, generating much more profits.
  • Make even bigger purchases with cross-sells and up-sells.
  • Become an advocate for your business and refer others to you.

That’s why this marketing system should start with an “ethical bribe”, an incentive for your prospects to willingly and voluntarily raise their hands and become your leads.

Well, that’s it for today. Next issue I will show you my online marketing funnel system and the role Pareto’s Principle plays in that system.

Meanwhile, post your comments below.




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5 thoughts on “Pareto’s Principle: The 80/20 Rule

  1. Interesting – I’ve never seen Pareto’s principle applied to client “triage”. Great advice in trying to get more business from the clients that are already your “A” customers.

  2. John Taylor says:

    Hi Case,

    Nice post. I recently launched a new product using the RAP script and noticed that the numbers turned out pretty close to the 80/20 Pareto principle.

    About 80% of the sales came from roughly 20% of the customers who invested some time to promote the product.

    Take care

    John

  3. SEO Services says:

    Pareto Principle is generally good in analyzing a business. For example, 80% of my workforce extra workload is coming from 20% of my clients. 70% of my profits coming from 30% of my clients. By doing such analysis, you will be able to see the importance of certain areas in business.
    Rif Chia

  4. @Stevens
    Pareto has worked well for our company over the past years. We don’t weed out the bad ones, normally we will brainstorm the root of the problem and try our best in resolving the issue.
    Rif Chia

  5. Nicole Dean says:

    I was first introduced to this concept in the Tim Ferris “Four Hour Workweek” book and it makes perfect sense.

    I find it especially true when outsourcing. It’s important to only pay a provider to do work for you on the projects that are actually profitable (or are projected to be profitable). I see many people just toss “easy” or “unimportant” jobs at their helpers and then grumble when the outsourcing isn’t doing what they’d hoped.

    Thanks for a great post.
    Nicole

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