What is the 80-20 Principle
One of the exciting principles that one learns at an MBA School is called "The Pareto Principle", also known as the 80-20 principle. This rule has been discussed so exhaustively that it has lost its charm even before its actual utility.
This 80-20 principle, in simple words, tells that 80% of the results come from just 20% of the action.
Respect to Pareto
Vilfredo Federico Damaso Pareto is the person behind the 80-20 Pareto principle. Born in Italy in 1848, he was an influential philosopher and economist. Legend has it that he noticed that 20% of the pea plants in his garden generated 80% of the healthy pea pods.
This observation caused him to think about uneven distribution. He thought about wealth and discovered that 80% of the land in Italy was owned by just 20% of the population. He investigated different industries and found that 80% of production typically came from just 20% of the companies.
Some examples of the Pareto Principle
20% of criminals commit 80% of crimes
20% of drivers cause 80% of all traffic accidents
80% of the pollution originates from 20% of all factories
20% of the vocabulary constitutes 80% of our conversation
20% of the customers take up 80% of the time at the service outlets.
20% of a company's products represent 80% of sales
20% of employees are responsible for 80% of the results
80% of our time we spend in the 20% of our space in the house
20% of our clothes are used 80% of the time
80% of the time, we use 20% of the App on our smartphone
20% of students have grades 80% or higher
80% of our life we spend with the same 20% of the people
80% of bugs can be solved by fixing just 20% of the problems that cause bugs
80% of problems originate from 20% of projects.
20% of the sales reps generate 80% of total sales.
20% of customers account for 80% of total profits.
20% of patients account for 80% of healthcare spending
Is the 80-20 principle a thumb rule?
This "rule" is a precept, not a hard-and-fast mathematical law. Although the 80-20% principle is so close in most of the observations, It should be noted that the 80/20 principle is a simplification. In reality, the ratio tends to differ – for example, it could be 70/30 or 99.9/0.01. However, it is seen that 80-20 is the best approximation one can add up to while making all the rational decisions.
Companies and 80-20 principle
"What is important is rarely urgent; what is urgent is rarely important."
80-20 principle is proven to help companies succeed by counterintuitive means: not by doing more, but by doing less.
For example, it has been seen that while ranking a company's products by profit and sales figure, it has been seen that 20% of a company's product range actually accounts for 80 per cent of their profits.
A broad range of products requires, among other things, more complicated logistics, more training for salespeople and a lot more administrative work than a narrow range. These factors increase the overall cost to the company – possibly even more money than the additional products bring in.