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Pareto’s 80/20 Rule

The 80/20 Rule is one of the most powerful ideas you can use in most aspects of business.

You’ll find it discussed in my post on The 20 Best Business Books of All Time.

In The Four Hour Work Week, author Tim Ferriss recommends focusing your attention on the 20% of projects that contribute 80% of your income; and firing those 20% of your customers who take up the majority of your time and trouble.

The 80/20 Rule is also featured in the Tipping Point (where author Malcolm Gladwell calls it The Law of the Few).

The 80/20 Rule — also known as the “Pareto Rule,” “Pareto Law” or “Pareto Principle”– is named after Vilfredo Pareto who observed in 1906 that 80% of the land in Italy was owned by 20% of the population.

Pareto and others quickly learned that the 80/20 rule is applicable to numerous situations (business and otherwise).

To find out more about Vilfredo, and the mathematics behind Pareto’s Principle check out Pareto Wiki.

My Personal Examples of Pareto’s 80/20 Principle

Here are some 80/20 examples I’ve personally experienced in life (note: I’m rounding my numbers).

  • 80% of the money I’ve raised for startups came from 20% of investors.
  • 80% of the Web traffic to this blog comes from 20% of the traffic sources.
  • 20% of the advertising campaigns generated 80% of the Web traffic for a business I’m associated with.
  • About one in seven venture capital investments is said to be a major success (that would be 14.2% of investments creating the cast majority (80%+) of investment returns).
  • 80% of my happiness every day typically comes from something I did during a few hours (e.g. 20% of my awake time)
  • 80% of our profit comes from 20% of our products.
  • 95% of sales in one business I ran came from 20% of my sales team (one of five sales people)

You’ll notice that in a couple of my Pareto’s Rule examples the numbers aren’t 80 and 20: The Pareto distribution doesn’t have to be exactly 80% and 20% nor does it have to add up to 100%. It’s just an approximation.

I was amazed to see how many 80/20 and Pareto books are available on Amazon. While I haven’t read any of them, here’s a link to some:  Books on the Pareto 80 20 rule.

Thanks, Vilfredo!

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