Summary: The Pareto Principle describes how in a variety of situations, 80% of a product or phenomenon’s output often comes from only 20% of the available input. For example, a business may receive 80% of its income from the sale of only 20% of the products available in their inventory.
Originators: Vilfredo Pareto (1848-1923), Dr. Joseph, M. Juran (1904-2008)
Keywords: 20/80 principle, 20/80 law, 20/80 rule, productivity, business, prioritizing, Pareto’s principle of unequal distribution, distribution, wealth distribution, input, output, products, profit
The concepts behind the Pareto Principle were described by Vilfredo Pareto in the late 19th century. Pareto observed the wealth distribution in his home country of Italy and noticed that 80% of all the wealth was held by 20% of Italy’s richest people.
In the 1940s, Dr. Joseph Juran was studying Pareto’s work and realized that this 80/20 rule could also be applied to the area of quality control. When looking at defects in products, he observed that most of these defects were being caused by a small number of problems in the production process. He called this principle Pareto’s Rule in honor of its founder.[i]
Over time, people have described how this 80/20 law can be applied to a variety of areas related to economics, productivity, marketing, cost estimating, and healthcare.
Real Life Examples
A number of real life examples describe how a smaller percent of a situation’s effects lead to a much greater percent of that situation’s results.
In 2002, Microsoft announced that 80% of errors that occur in their system are caused by 20% of all bugs found in their system.[ii]
The American distribution of wealth holds closely to the 80/20 rule. In 2012, 20% of Americans held 89% of all wealth in America.[iii]
Pareto’s principle has been noted in relation to healthcare, as a small percentage of patients use the majority of healthcare resources.[iv]
Prioritization and Increasing Productivity
Pareto’s principle continues to help people by showing best ways to prioritize resources. Noticing unequal patterns of distribution and acting on this knowledge is a great way to improve businesses and personal productivity. Those who observe this principle are able to prioritize in ways that lead to increased quality, productivity, and profit.
For example, in some businesses, 20% of employees complete 80% of the work. Employers may notice workers who are high producers and consider providing a raise or promotion. Contrarily, they might notice low producers and seek to determine what is leading to low levels of output.
In some businesses, 80% of sales come from a mere 20% of products. Some products are much more popular than others. Businesses may take notice of what qualities these popular products hold and seek to produce similar products that appeal in the same way.
If 80% of views on a blog come from 20% of the articles, this is a helpful way to determine best types of articles in the future. Or, if a person completes 80% of their best work in 20% of their working time, this is a great way to consider what conditions lead to greatest productivity.
Pareto’s principle helps people notice patterns and act on them to improve the ways they go about work and production. It helps people decide how to best use resources to make a profit.
References
[i] The Economist. (2009). Joseph Juran. Retrieved from http://www.economist.com/node/13881008
[ii] Rooney, P. (2002). Microsoft’s CEO: 80-20 rule applies to bugs, not just features.
[iii] Wolff, E. N. (2012). The Asset Price Meltdown and the Wealth of the Middle Class. New York: New York University.
[iv] The High Concentration of U.S. Health Care Expenditures: Research in Action, Issue 19. June 2006. Agency for Healthcare Research and Quality, Rockville, MD. Retrieved from http://archive.ahrq.gov/research/findings/factsheets/costs/expriach/index.html
