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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!

8 Comments

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    [...] Pareto's 80/20 Rule [...]

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    [...] is similar to the Pareto Principal in which 20% of what you do typically creates 80% of your [...]

  • http://robdkelly.com/blog/business-networking/go-givers/ 7 Easy Tips On How To Be A “Go-Giver” (Not A Go-Getter) | Rob Kelly

    [...] client without bringing a new idea or some value into it.” (Direct Marketer Les Wunderman).5) The 80/20 Rule — “Spend 80% of your time asking about THEM, not talking about yourself and [...]

  • http://robdkelly.com/blog/models-frameworks/munger-mental-models/ The Top 100 Mental Models (Inspired By Charlie Munger) | Rob Kelly

    [...] the causes.I wrote a whole piece about the Pareto Principle, including 7 of my own examples, here: Pareto’s 80/20 Rule.Parkinson’s LawNamed after Cyril Northcote Parkinson who stated in an essay in the Economist [...]

  • Louis

    Hi, I’m currently reading the four-hour workweek, and just learned about the 80/20 rule. I’m inclined to believe the rule is accurate for many situations, but I have a hard time seeing how it translates in my business: restaurants. 

    To be honnest, I didn’t establish official statistics, but I don’t think we make 80% of our profit from 20% of our dishes, or 20% of our clients (true, a few people come here everyday, but they have like 2 beers most nights, and eat a couple times a week..). Do you have any idea how the principle can be applied to make a restaurant more efficient, or just understand better the way the business works ?

    Thanks

  • http://www.robdkelly.com Rob Kelly

    Good points, Louis. Certainly there are instances in which the Pareto 80/20 principle will not apply.

    Though it sure is fun to wonder if any of the following might be true in your business:

    • Do 20% of your customers provide you 80% of your happiness

    • Do most of your customers receive 80% of their pleasure from 20% of the menu items (my favorite restaurant in San Francisco is Delfina and I only every order one of a few dishes (chicken or spaghetti or steak), even though they have many more.

    • If you asked your wait staff what their tips for the night were, is it possible they received the vast majority (80%+) of their tips from just a handful (less than 20%) of their tables?

    • Do 80% of your drink orders come from 20% of the drink options (or alcohol suppliers)?

    • If you have an online presence for your restaurant, does 80% of your Web site traffic come from just 20% of the number of Web sites linking to you (many restaurants receive the vast majority of their partner Web traffic from Google and Yelp).

    • If your restaurant is open 10 hours per day, do you receive the vast majority of your foot traffic during 2 hours of that?

    Let me know what you think…or perhaps you’re the Pareto exception!

  • Louis

    Hi, thanks for the answer! 

    You made some good points. I think it’s pretty much right on as far as drinks and traffic go. I never understood bars who have crazy long lists of cocktails and beers when people order the same things all the time. 
    I can’t tell you about web trafic though, since we don’t have a website, and concerning tips, I live in France, so they really don’t amount to much..

  • http://www.robdkelly.com Rob Kelly

    Thanks, Louis. Glad there’s at least a little bit of the Pareto 80/20 rule going on!