What is the 80 – 20 Rule (Pareto Principle)?

What is the 80-20 Rule?

The Pareto Principle, commonly known as the 80-20 Rule, was developed by Italian economist Vilfredo Pareto in 1896. Pareto found that 80% of the land in Italy was owned by only 20% of the population and later noticed this also true for gardening, so 80% of produce from plants came from only 20% of plants. Essentially, the concept is that 80% of outputs come from 20% of inputs.

It is essential to understand that the principle is not a straightforward numerical conversion but rather a more theoretical one. Applying this rule will help you identify the most profitable product or service you provide, and the most productive tasks or marketing techniques so you can improve accordingly.

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How to use the 80-20 rule?

When evaluating your data and information you may find a common trend where for example, 80 percent of your productivity comes from 20 percent of the tasks you do daily. So overall 20% of your efforts produce 80% of your results. You can apply this rule to break down and make conclusions from any data or information.

Why is the Pareto Principle important to your business?

The objective of the Pareto Principle is to show you the tasks or projects you should focus on so you can work harder on the tasks that matter the most and so you don’t sweat the small things. Therefore, it is important to evaluate the impact of initiatives to prioritise the ones which yield the best results. This allows you to make more articulated business decisions like slim lining and niching down your business, using data and research to back this up.

Learn more about how we use the 80 20 Rule in our Business Coaching.

Benefits of the 80-20 Rule: 

– Best assets: The Pareto analysis can help you identify your business’s best assets, such as the most profitable system or service. This can reveal a unique selling point you weren’t previously promoting or a new type of product that you could start selling.

– Profitability: Just as the 80/20 rule can help you identify the most profitable parts of your business, it can also help you define the problem areas of your business. Using this analysis businesses can benefit differently, for example, they can take lessons from areas that are working successfully or provide training to support low-performing team members, and some can improve or create new products to meet demand.

– Reduce Costs: Using this principle can help businesses spend more efficiently on resources or services they may be outsourcing to reduce wasting money on the systems and tools that are not working for them. Instead, you can spend some time finding better services with more inclusive packages and better prices.

– Informed decisions: As you make changes to develop your business this principle helps make more informed decisions. For instance, can help decide whether to let go of underperforming staff to reduce overheads or to train and upskill staff so they can work more efficiently and support in more areas of the business.

How does the 80 20 Rule apply to certain industries:

1. Hospitality Industry: Hospitality is a popular industry comprised of hotels, cafes, motels and holiday inns. These businesses can use, for example, the 80-20 rule to evaluate customer service, 80% of customer service ratings come from 20% of the customer service team. This shows the customer service team need support with customer enquiries so introducing new training can improve their customer service rating and trust.
2. Retail Industry: Retail businesses such as supermarkets, shops, bakeries, takeaways, and restaurants using the 80/20 rule may find they earn roughly 80% of their profits from 20% of their products. Retail or salespeople can learn which products are selling the best and which ones need to be improved.
3. Financial Industry: Finance and economic businesses, such as accountancy firms, may use the 80-20 rule to find that 20% of costs led to 80% of their expenses for their clients. Using this Pareto Principle can help break down chunks of data so it is easier to understand.
4. Marketing Industry: Marketing is a huge industry where the 80-20 rule can help establish which campaigns, platforms or strategies are working best. In terms of marketing for example, 80% of the results will come from 20% of the marketing campaigns you run, therefore it’s essential to measure the results so you can identify the 20% that works. Not only does it mean you can put more money into the marketing that works, but you can also eliminate spending on inefficient campaigns. You can see now why the 80/20 rule can be used to help break down the campaign and delve deep into the results to identify; marketing platforms, types of advertising, tone of voice and many more metrics, to make sure the campaign runs super efficiently for your chosen target market. 

4 best ways to apply the Pareto Principle:

1. Time Management: To manage your time better, focus on the areas of your business that will have the most impact. This can be done by using the 80-20 Rule. For example, to improve your time management you can delegate tasks to focus on important tasks, update your calendar regularly or create detailed to-do lists. Alternatively, you can use software such as Toggle to identify the time taken for each task to improve time management.
2. Increase Profitability: Use the Pareto Principle to identify your business’s most profitable services and products, and strategise accordingly to minimize losses. Once you have identified the most profitable areas of your business you can prepare better budgets, and analyse profit margins.
3. Productive vs Unproductive: Improve your daily routines and prioritise important tasks to become more productive in your business. Also, you can set and review daily or weekly targets to ensure you are on track. To focus on the high-priority tasks and to reduce costs you can use automated systems such as Xero for financial & administrative tasks.
4. Good and Bad Results: Easily identify the areas of the company, employees, or products that are doing well, and seek out new technologies or processes to enhance your results. For instance, integrate tools such as Google Analytics, to track the online performance of your business.

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Now you know the benefits and uses of the Pareto Principle, you can analyse and understand your business better to make more informed decisions.