What is the Pareto Law?
According to the Pareto Law, which also goes by the 80/20 rule, 80% of the output in a certain situation or a process will be determined by 20% of the input that goes in. The law is named after Vilfredo Pareto who was an Italian economist. He had observations written down on how 20% of the Italian population owned 80% of all the property. Later on in the 1940s, the theory was further developed by Dr. Joseph Juran, who is also known as the father of Quality Control, as he applied the law in business situations.
Even though the law cannot be applied to every situation, it gives you an idea of most typical situations. The gist of the law is that a small proportion of inputs leads to a large proportion of outputs. Some of the examples of the Pareto Principle are:
- In a production company, 20% of the labor is responsible for 80% of the company’s output.
- An employee investing 20% of their time will yield 80% output.
- In a software company, software bugs amounting to 20% will lead to 80% losses for the company.
- Investment adding up to 20% will result in 80% increase in profits.
An important misconception of the Pareto Principle is that the numbers always have to be 20% and 80%. The most important thing to be understood here is that the majority of things in life will not be evenly distributed, as some will contribute more than others.
Why things aren’t evenly distributed according to the Pareto Law?
The Pareto Principle says that things aren’t evenly distributed, and the fundamental concept is that every unit that goes in a process or situation will not be contributing the same amount of effort or output.
In an ideal situation, all employees will be contributing the same amount of effort and time, and output would be according to that making planning very easy and convenient. However, in the real world that is not the case.
The Pareto Principle is derived from the fundamentals of power laws, which explain that two units have a functional relationship whereby a linear change in one results in an exponential change in the other. As a result, things are not evenly distributed because the Pareto Principle describes a distribution that involves a negative exponent, causing one quantity to decrease as a power of the original quantity when the other quantity increases. Vilfredo Pareto observed this phenomenon in action when he noticed that as the wealth of Italy increased, the number of people responsible for it decreased. This makes the law applicable to many real-life situations. For example, in a sales team, a small group of people may be responsible for a large portion of sales compared to the whole team.
Having said that, it is important to remember that it is not the exact distribution that matters when implementing the Pareto principle but that it will always come down to a minority being responsible for the majority of the outcomes.
Pareto Principle in Economics
The Pareto Principle explains a number of global phenomenons, one of them being how wealth is distributed in countries around the world such as the United States of America. In the U.S., approximately 85% of the wealth of the country belongs to the top 15% of the population. However, this is not just the case in the U.S., as research by the Human Development Reports, explains that more than 80% of the wealth across the globe is in the hands of a mere 20% of the world’s population. This is exactly what Vilfredo Pareto had observed in Italy, and it is something that is applicable in most countries.
Apart from explaining the disproportionality of wealth distribution, the Pareto Law is used to explain a number of situations that occur in the business environment. Joseph Juran, who further developed the law, was an engineer and he noticed that in the departments of Quality Control, production defects arose from a minor number of causes and reasons. He described this as the "vital few and the trivial many". He later went on to say that as many as 80% of innovations are the product of only 20% of the people that are involved, 80% of decisions during meetings are made in 20% of the total meeting time, and 80% of success results from 20% of the effort put in, and so on.
Currently, the Pareto Analysis is used by business and production managers in a number of industries to understand key issues that cause problems in departments. Statistical techniques are used to establish cause-and-effect relationships, after which the Pareto Principle is applied.
Pareto Principle in Sports and Safety
The Pareto Principle is not just restricted to situations related to business and economics. It branches out to many different areas, one of which is sports. The essence of the Pareto law says that things are not weighted equally, so it is not surprising that this concept can be applied to sports to understand several things. For one thing, some ways of training and exercising will have more productive results than others.
Sportsmen and coaches have to figure out how to design their training sessions in such a way that they yield the most return. Ideally, all training and effort put in should help the sportsman in one way or another, but according to the Pareto Law, this is not always the case. Therefore, athletes should focus on methods that provide the maximum amount of return by evaluating the 20% of things that will either bring them closer or further to meeting their goals, such as diet, workout routines, and even training partners.
Just like in sports, the Pareto Principle can be applied to the safety and well-being of citizens. For example, more than 3 million deaths occur in the U.S. due to 8-10 reasons, meaning that a significant proportion of deaths are caused by around 20% of the listed causes. This means that if organizations focus their attention on these key causes, there is a promising chance that deaths could be reduced drastically and problems can be solved much more quickly. Many healthcare organizations have already started to apply the Pareto Law and are working to improve the quality of life for all citizens.
Examples of the Pareto Principle in real life
The Pareto Principle is being increasingly used to describe things ranging from economics to technology. Common examples include:
- When it comes to team-based projects, 80% of the results are achieved with 20% of the amount put in, this means that a couple of people in the team will be more responsible for the success of the project than some others.
- In project management, managers have realized that there are 20% of the total number of projects that cause the most amount of problems.
- When it comes to technology, most software problems result from a small number of bugs. It has also been observed that around 80% of users only use 20% of the feature of certain software.
- When looking into the sales and marketing department, the majority of the sales come from some top most frequently used products. Along with that, around 80% of the sales are the resulting efforts of 20% of the salesmen. There is also a rule of thumb in sales marketing that says, Majority of the complaints stem from a minority of the customers, approximately 20%.
- If we take life in general, the Pareto Principle can be used as a motivational tool. According to Woody Allen, 80% of success is just showing up which would only amount to 20% if you look at the bigger picture.
How to get started using the Pareto Principle
Everyone has set goals in life that they are working towards. These people can use the Pareto Principle to their advantage and yield the maximum amount of results, bringing them much closer to their goals and ambitions.
Firstly, the Pareto principle can be applied to how you utilize time. Most of us are guilty of wasting time and procrastinating till there is no time left. However, all we have to do is look closely and analyze what parts of the day or the week are we most productive during. Some people are highly productive in the mornings, whereas some are productive at night. For some of us, there is a certain day of the week during which we are most efficient, and if we are able to pin point what day this is then it is possible to mold the rest of the week according to that specific day. This is an aspect where the Pareto Law comes to work.
Many people struggle with getting started, however, it doesn’t have to be difficult at all if the Pareto Law is put into effect. People can simply start by identifying the 20% of their efforts that result in 80% of their satisfaction, or even dissatisfaction for that matter. This will enable people to either highlight their key strengths and weaknesses so that they can enhance them or eliminate them.
Problems with the Pareto Principle
The Pareto Principle may seem like the ideal law to explain a lot of situations; however, it has a number of flaws. Firstly, the Pareto Principle provides insight into things that have occurred in the past, and that is where it is problematic. The Pareto Principle cannot explain every possible situation which is why a small business may feel like that the principle is not applicable in their cases.
Secondly, the Pareto Law only establishes a basic cause and effect relationship and don’t give explanations for anything beyond that. For instance, according to the Principle, the customers who bring in the most amount of revenue should be given the most attention. If a business were to follow this, this would result in the loss of clients who aren’t key customers.
Thirdly, the law will tell you that a small number of factors are responsible for a large part of revenue for a business but it fails to take into the amount of time that each factor is taking. Some factors may take less time than others which is why they are more successful.
Despite its flaws, the Pareto Principle gives us a very good insight on things that are dependent on each other which provides the opportunity of focusing one’s time and attention to those things. With that being said, it is important to use this rule wisely and not just when it’s convenient, as that is when it will be most effective and efficient.