Pareto Principle

Last updated: 7 April 2023

80% of outputs come from 20% of inputs

The Pareto Principle, also known as the 80/20 rule, suggests that 80 percent of outcomes come from 20 percent of inputs. This rule has been applied in many fields, including economics, engineering, and business management, to achieve a goal by focusing on essential elements. The Pareto Principle maximizes efficiency while minimizing effort.

Origin

Economist Vilfredo Pareto first expressed this phenomenon in 1896 when he observed that 80% of Italy’s land was owned by 20% of its population. He later expanded this observation to other countries and industries, concluding it was a universal phenomenon. Pareto theorized that most events aren’t randomly distributed. Instead, they seemed to follow an unequal distribution pattern where most results come from a minority of causes.

How it works

The Pareto Principle suggests that only a fraction of causes or inputs create a large portion of outcomes. For example, in business management, this might mean that 20% of customers lead to 80% of sales. Therefore, we should focus on the areas most likely to yield the desired results.

How to use it

The Pareto Principle is useful in any situation with limited resources and a desire to maximize outcomes. Businesses can use it to identify areas where they should focus their efforts for maximum benefit—for instance, identifying the key areas responsible for customer satisfaction or sales growth. At a personal level, we could determine which activities produce the best results while expending minimal effort.

Examples

Studies have shown that 80% of errors occur due to 20% of bugs in software development processes, and 80% of profits originate from 20% of products within companies. The Pareto Principle is applicable outside business management—for instance, United States researchers have found that roughly 20% of healthcare costs come from 1% of hospital stays and 82% come from physician services.

Takeaways