80 20 Rule – Applying Pareto Principle Correctly to Business

80 20 Rule – How to apply Pareto Principle correctly every where – UE

80 20 Rule
80 20 Rule Explained

About 80 20 Rule, Founder Pareto, Principle Applications

I was recently reading the book, The 80/20 Principle: The Secret to Achieving More with Less (not because it looks like some self help crap but serious applications of the 80 20 Rule), it is then I stumbled upon the fact that all of this while we have been using this principle horrendously wrong.  The biggest stupidity being people saying that 80 and 20 have to add up to 100 – No, Hell No!  80 20 Rule does not say that and nor does Vilfredo Pareto the founder of the Pareto Principle, it just mentions the distribution of the odds in favor and against.

Let’s read on for more clarity on this.

80 20 Rule : The 80 20 Rule or the Pareto principle as it is widely known, is a thumb rule for measuring distribution between inputs and outputs and is named after legendary economist Vilfredo Pareto.  The rule states that there is an unequal relationship between inputs & outputs. The principle states that 20% of the input variable is responsible for producing output of 80%.  This is called as the “Pareto Principle” or the “80/20 rule

This principle serves as the backbone of the fact that inputs and outputs are unevenly distributed.  For e.g. the hard work of 20% of a company’s work force will drive about 80% of their profits or revenue.  For personal time management, 80% of your growth output will come from 20% of your invested time at personal growth.

Vilfredo Pareto : He noted the 80/20 rule while he was at the University of Lausanne in 1896, “Cours d’économie politique”.  Essentially, Pareto showed that about 80% of the land parcels in Italy were owned by 20% of the population; Pareto developed the principle for management use by observing that 20% of the peapods in his garden contained 80% of the peas [agriculture use].

You will be Interested in Reading : How 20% of Business Model Examples Generate 80% of Business for StartUps

What is the 80 20 Rule

Pareto Principle
Pareto Principle applied Everywhere

The Pareto principle is also called as the 80/20 rule, the law of the vital few, or the principle of factor sparsity states that, for almost everything, about 80% of the effects come from 20% of the causes.

This in turn means, 20% of the input will cause 80% of the output.

Few examples stating this rule are as follows:

  1. 20% of the input effort creates 80% of the results
  2. 20% of the work force in your company produce 80% of the sales / profits
  3. 20% of the customers in your pipeline will give you 80% of the sales
  4. 20% of the bugs in apps / websites cause 80% of the crashes and 20% bugs fixed will stop 80% of the crashes
  5. 20% of the features in your product will cause 80% of the usage; and on and on…

Common Misconceptions about 80 20 Rule

People think of the 80 20 Rule as a law because the name states it as Pareto Principle, please note that it is just an observation or a thumb rule that you can use to judge the outcome or the effect of the cause.  It states that most things in life are not distributed evenly i.e. Life is Not Fair for 80% of the public.

There are lof of misconceptions about how to use this rule, let’s not abuse this 80 20 rule 80% of the times – another strategy team joke 🙂 .

First, there’s a common misconception that percentages of 20 and 80 must add to 100.  It can always be a weird distribution like 20% of the plants could create anything like 10% of the flowers or 60% or 78% or 99%, or even 100%.

Remember that the 80 20 rule is a rough guide about typical output distributions and not an exact guide that will always stay at 80-20.

Also the distribution variables need not be exactly “20%” and “80%”.  The key point is that almost all things in life (effort, reward, output, wealth) are not distributed evenly.

Correct Applications of 80 20 Rule

You will be Interested in Reading : 80% of StartUps have Poor Unit Economics

  1. 80 percent of results : 20 percent of efforts
  2. 80 percent of physical activity : burns 20 percent of the body resources
  3. 80 percent of product usage : 20 percent of users
  4. 80 percent of the difficulty in achieving a goal : lies in the first 20 percent of the challenge [The beginning is difficult, a book which is on the exact same principles is The First 20 Hours]
  5. 80 percent of revenue : 20 percent of customers
  6. 80 percent of problems : 20 percent of causes
  7. 80 percent of profit : 20 percent of the product range
  8. 80 percent of complaints : 20 percent of customers
  9. 80 percent of sales : 20 percent of sales people
  10. 80 percent of pollution : 20 percent of businesses
  11. 80 percent of work absence : 20 percent of staff because 80% of people are ill 20% of the time
  12. 80 percent of road traffic : caused by 20 percent of inefficient drivers
  13. 80 percent of a restaurant’s turnover : 20 percent of its menu
  14. 80 percent of your time spent on unicornomy : spent on 20 percent of the content
  15. 80 percent of wealth : held by 20 percent of the populace

Using 80 20 Principle in StartUps

StartUp founders waste their important part of the day-time on what I say 100$ an hour work – e.g. panicking on outage of proposal paper and running to get it at the office supplies shop.  Meanwhile, they forget focussing on the the activities that they earn $1,000 an hour from, such as sending the right email or dialling the right number to the right person, or negotiating a sales deal, or convincing a client for upselling opportunities to do more business with you.

Entrepreneurs don’t understand the efficiency of the 80 20 principle – the top 20 percent of customers give you 80 percent of the revenue.

Entrepreneurs are prone to ego satisfaction wars, “I can do it myself.” Then we spend six hours trying to perfect that ad-campaign or fix a bug from our algorithm.

Sure, we may be competent to do all of those little 100$ jobs and you may have to do it sometime (20% of the time) but you must not waste the balance 80% of the time as well in doing that small money job just focus on the 1000$ per hour job.

We’re always thinking that I will do the bare minimal monetary outgo jobs and hire costly people for the jobs like sales and marketing and public relations. These are extremely high-skill tasks and no one can do it better than you. It’s stupid to delegate these tasks to someone else. Hire someone to do your laundry, or sort through your email or reply to social media posts etc. and use your time to do the rest of the important stuff. [80 20 Rule : Do 80% of the important stuff on your own in 20% of your time]

Hire a maid for all the non money making jobs that you need to do.  Hire a social media ninja to do all that crappy commenting and replying to social media posts.

Hire a personal assistant (virtual ones). With some effort you can hire a perfectly competent person at $8 to $15 per hour.  Virtual is fine. [Pareto Rule : 80% of the small tasks, 20% of the total cost]

Automate everything that is non mission critical – use python / Django to automate boring tasks that posting on facebook about your updates, updating twitter, updating other social networks, emailing wishes etc.  I use IFTTT and Python in combination and dont even touch all of my social media channels.

Don’t feel guilty about relaxing. The most productive people are a little lazy. If there are really only a few hours a day in which you do $1,000-an-hour work, does it really matter if you screw around for the rest of the day?  Feed your brain in the rest of the time, so you’re sharp about everything important. [Pareto Rule : 80% of the time working, 20% of the time relaxation]

Focus on your most productive time slot.  Remove useless decision making from that time.

80 20 Rule in Life

80 20 Rule is something that every one can use on an every day basis in their daily lives, it is like economics with a single principle i.e. law of diminishing returns.

If a housewife is bargaining very hard for the past 15 minutes, it is simply not worth it because 80% of the savings from bargaining will result in the first 5 minutes (33% of the time) the next 10 minutes will only result in futher reduction in price of about 10%.

No need to monitor your savings and investments on a daily basis, give an event based trigger and monitor it only during 20% of important events so that you can take a dig at it later.

80 20 Rule in savings and investments : 80% goes to long term investments and 20% for your immeidate requirements.

Law of Diminishing Returns : 80% of the neighbours will be helpful 20% of the time only close ones will be helpful till then end of the horrific situation you are in.

Pareto Principle on the Graph

80 20 Principle
Pareto 80 20 Principle Graph

As per the 80 20 Rule Majority (80%) of the things won’t follow the normalized linear graph of growth.

The output of pareto principle will exponentially increase till the first 20% of the input which results in this parabolic graph and than would plateau out towards the end of the balance 80% of the effort in the input and would meet the linear graph at the end point of the graph.

Pareto Principle of Pareto Efficiency

Pareto efficiency, also called as “Pareto optimality,” in pareto principle as an economic state where resources are allocated in the most optimal manner.  This is also called as “Some one must loose for the other party to make money” and is visible when a distribution strategy exists but one party’s situation cannot be improved without making another party’s situation worse [customer vs corporations]. Pareto efficiency does not imply equality or fairness i.e. Life is not fair.

E.g. In Stock market, some one must have sold it at a loss for the next person to make money – the stock can not make money till perpetuity if held by multiple persons.

Venture Capitalists also make money by working on 80 20 Rule by this same methodology with a twist of numbers, 1% of their investments will make 100% of their money, rest 99% will bite the dust.  They also allocate 99% of their money towards the money making investments.

Pareto Principle of Immunity

Our body via the 80 20 Rule is naturally immune to 80% of the diseases for 80% of the time thus the body state will depend on the economic zone of the body’s current condition which is the basis of the entire healthcare industry when they make most of the money during monsoons (for viral fever and etc), during summers (for sub burns), during winters (for hypothermia etc).

Concluding Arguments on 80 20 Rule :

  1. Use the 80 20 Rule wisely, don’t over do it (don’t use it 100% of the time)
  2. Use the pareto principle of diminishing returns in every day life, use lesser and lesser resources and time towards the end of the assignment.

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