Examples and Definition of the 80/20 Pareto Principle

Understanding the Pareto Principle: The Pareto Principle States That…

Also known as the 80/20 rule, the Pareto principle explains the connection between actions and consequences. This phenomenon is known by several other names such as the principle of factor sparsity. Let’s take a look at all of them.

This is not a math equation per se, and it is definitely not set in stone as such. 

The Pareto Principle indicates that for the majority of outcomes, 80% of the outcomes or consequences arise from 20% of the causes. This refers to the cause-effect process. It goes to show that only a small percentage of causes make for an outsized effect.

Let’s visualize this concept so that you can understand it better. 

In the business world, the goal of the 80/20 rule is to tell you which inputs have the highest potential for the majority of outputs so that you can prioritize them. 

Managers and other business people use this to identify the things that are vital to accomplishing a goal or to an organization’s success. When you know what these are, you can focus on them.

Even though this axiom is mostly used in economics and business, it has many other applications today, too. You can apply it to anything at this moment, including a variety of fields as well as personal needs. 

People use it to track and optimize their personal finances, control their spending habits, and even to gain a better perspective in terms of their personal relationships. 

Let’s take a look at some great examples of using this principle in different fields and areas in life.

In demographics and economy:

• 80% of all crimes on a global level are committed by 20% of the total number of criminals
• 80% of the global market at any point is controlled by a total of 20% of businesses

In healthcare:

• In 80% of all healthcare and helahtcare-related procedures, only 20% of the equipment is being used
• 80% of finances in healthcare are put into 20% of medical research

In business:

• 20% of production factors are the cause of 80% or problems in production
• 80% of a company’s profits are an outcome of 20% of the investments that the company makes

In everyday life:

• 80% of your time should be used in 20% of activities that will help you achieve your goals
• Only 20% of X appliances consume 80% of the energy you spend at home

The Pareto Principle was first used in the field of macroeconomics in the beginning of the 20^th century. The person that introduced it to the world was an Italian economist Vilfredo Pareto who came up with the concepts known as Pareto Efficiency in 1906.

While these numbers aren’t always accurate, they give people a nice perspective into the causation process. The Italian economist founded the 80/20 rule after detecting that 20% of the pea pods in the garden he owned were responsible for 80% of all the peas he grew. As Vilfredo Pareto noticed this, he decided to expand it into macroeconomics, he decided to use it to check wealth distribution. He soon realized that only 20% of the Italian population owned 80% of the wealth of Italy.

That’s when it all began. 

The Pareto Principle in Quality Control

Have you heard of the Six Sigma quality control methodology?

This refers to a methodology that businesses use to improve their work and products by finding and eliminating the defects. The idea behind it is to streamline the quality control process in businesses to eliminate errors and unnecessary expenses.

Here are the 6 objectives of this methodology:

Well, that same Six Sigma quality control methodology uses the Pareto chart and analysis as the key tools to discover this data.

By using a Pareto chart, you can visualize the data better and figure out which actions need to be prioritized. The goal of Six Sigma is to reduce variation in a given process and increase the company’s product development and quality.

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The Pareto Principle and Customer Satisfaction

One of the best things about the Pareto principle is that you can use it to boost customer satisfaction. Let’s take for example, your brand’s online reputation. Applying the Pareto principle to this, it would look something like this: 80% of the buyers you get for your brand are from 20% of your online feedback.

When companies know this and have the necessary data to make improvements for their brand’s image, they can take action. Since testimonials bring you so many leads and customers, you should take actions to improve them and increase their numbers. For starters, you should book a demo with Trustmary, the leading company that helps businesses collect testimonials and boost their online rating.

When the population sees that your brand has been gathering chatter online, they’ll be more interested to see what you have to offer. People sharing their thoughts and experiences about your brand can convince others to give you a chance. Not only should you be working toward customer satisfaction, but also prompt them to share it with others. 

Not just that, but this tool can generate reports that will show you exactly what kind of outcomes you have achieved since you started using it. If you want to give it a chance, you can sign up for a free trial before you opt for the paid version.

This can go a long way toward finding and dealing with customer complaints. Essentially, Pareto’s principle in combination with such tools can eliminate customer complaints and reduce customer dissatisfaction.

The Pareto Principle and Customer Success

The Pareto rule is a popular customer success law. It states that repeat customers will generate revenue that’s 16 times more efficient than customers that only use your service once. In other words, 20% of a group is responsible for 80% of the sales, so once again, you get the potency of the 80/20 rule. 

What does this mean for you?

It means that if you identify a way to retain customers and convince them to buy more than once, you have higher chances for better revenue earned.

Let’s put this into action. Here is an example.

20% of your repeat customers are responsible for 80% of your revenues. The revenue efficiency of this is 80/20, which equals 4.

Your one-time customers, on the other hand, contribute 20% to the revenue for 80% of customers. Their revenue efficiency is 20/80, which equals 0.25.

These results point out the obvious – customer retention, loyalty and satisfaction should be your biggest priorities. Keeping the population interested in your brand after they make their first purchase is essential. At this point, you should be considering factors such as the number of customers you have, their demographics, purchase choices, etc.

How to Apply the 80/20 Rule: Pareto Analysis in Examples

As previously said, the 80/20 rule applies to all industries and can be used in personal life, too. This makes it an excellent tool for determining how you can maximize your outcome.

Let’s start with our first example.

A university student named Luisa was writing a research paper in Online Marketing. Her job was to explore the digital world, create a blog and have social media presence and write about it by the end of the semester. As expected, Luisa created the site and launched it. However, at the end of the semester, the online marketing evaluation showed that Luisa’s blog and social media had significantly lower search visits and following than that of other students.

At this point, Luisa started considering ways to improve this to boost her grade. That’s when she decided to use the Pareto Principle. To gain traction on the website and make her effort pay off, she applied the 80/20 rule in her project.

How did she apply this?

Luisa assigned the 80 number to everything that she did to create the blog, write its content, and launch it. This also included her social media channels and the activity there. She assigned the 20 to the visitors. Then, Luisa came up with some questions:

The answers to these questions gave Luisa amazing insight into what doesn’t work in her digital presence. Based on them, she changed the design of the blog, tweaked the content, changed her posting time, marketing strategies, etc.

Of course, while your focus on the top 20% that bring you 80% of your success makes sense, you should not forget about the remaining of them either. Even if you focus on the majority, the remaining eighty percent are important too. Still, by using Pareto’s principle, Luisa managed to best focus on and target the ones that make the difference between a successful and unsuccessful online presence. 

Following Luisa’s example, you can use the 80/20 rule for your business ideas, projects, and even to make some changes in your lifestyle. Let’s see how this works.

80/20 Rule for Productivity

Is your goal to become more productive in life? You can use this principle to prioritize those things that really have to be done before the day ends.

How will this work?

Write a list of all of your tasks. Completing just 20% of that list will result in 80% of impact that you can create for the day. The goal here is to get more impact done. This can be achieved by identifying the things that are of highest importance  and can turn your day into a very productive one. Then, all you need to do is focus on them. 

Think about questions like these:

• Do you have to work with others or can you complete the task on your own?
• Do you have to complete one task before you can complete another i.e. is one blocking your path to the next one?
• How simple or difficult is it to execute these? How long will it take you?

Once you know these answers, it’s time to take action.

80/20 Rule for Decision Making

One of the best uses of the 80/20 rule is that it can improve your decision-making and problem-solving abilities. Problems can have many potential causes, but thanks to the 80/20 rule, you can prioritize the possible solutions that lead to the best outcome.

Let’s take a different approach now. Here is a list of steps to achieve this:

 1.     Identify the issues that you are aiming to solve.

2.     Discover the causes for these problems.

3.     Categorize problems into different categories or groups (don’t be afraid to place them in more groups if they don’t fit into a single one).

4.     Assign a value to every problem based on how much they impact your project or your business. To make it simple, just pick a number between 1 and 10.

5.     Create a plan that focuses on the top 20% of those problems only by using the lists and values you just made. The idea here is to identify a single solution that will resolve more than one problem. That’s why you created categories – to facilitate business management and know what to focus on.

Wrapping Up

The Pareto Principle will show you how the minority of inputs create the majority of results. More importantly, it will help you determine what or who is the minority so you can prioritize it. If 20% of your workers contribute 80 percent of the company’s results and you know who those workers are, it’s best to reward and motivate them the most. If 80% of crashes in your system occur because of 20% of bugs, isn’t it best to know which bugs are the biggest problem and remove them first?

This goes on and on and while it only refers to a typical distribution, this principle has shown tremendous success over the years. It is even theorized to be a natural law. Regardless of its definitions, Pareto’s principle can help you improve the future of your business and potentially generate more income. Why not put in the effort and give it a test run, then?

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