Pareto’s Principle – The 80/20 Rule
A big part of being a leader means knowing certain things – or getting close when we don’t. So if I asked you right now what percentage of Americans own what percentage of civilian-owned firearms, could you tell me something close without looking it up? Most could not, but I am about to change that for you. Are you familiar with Pareto’s Principle – the 80/20 Rule?
The story of Vilfredo Pareto, or Dr. Joseph M. Juran for that matter, is entirely irrelevant to the point I would like to convey. I share their names to give credit where credit is due. Sure, history is essential, but the point I am making today is not historical so much as real-time.
The 80/20 Rule is damn near a law of nature. Pareto’s Principle was discovered in the world of economics when it was observed that 20% of the people owned 80% of the wealth. You’re thinking, “Ya, I knew that!” But did you know that this discovery was made in Italy in 1906? Go figure! Weird how it also holds true here in the states over a hundred years later, right?
However, you don’t have to be an economist to utilize this principle. It’s a rather basic principle and can be used with surprising accuracy in just about any given situation. Essentially, it means that 80 percent of your outcomes come from 20 percent of your inputs. Here are some examples:
- 80% of your business comes from 20% of your clients
- 80% of production is produced by 20% of the workers
- 80% of the points will be earned by 20% of the players
- 80% of our country lives in 20% of the space
Of course, this could also be a 20/80 situation.
- 20% of your customers are providing 80% of the complaints
- 20% of your staff will cause 80% of your problems
- 20% of your workers produce 80% of your results
- 20% of your inventory may take up 80% of your warehouse
Look at it from a personal point of view. Perhaps you are spending 80% of your time doing something you hate and spending 20% of your time doing something you love. Now you know that needs to change.
This is an easy way to identify potential hazards or negatives, or even positives and victories, without being some statistical wizard. Are there exceptions to the rule? Sure there are! Especially if you are trying to tear it apart, sort of.
For example, someone might argue that they own a grocery store and that the sales floor is filled with different products from various vendors. That is probably true, but wouldn’t it be accurate to say that the sales floor is likely split as roughly 20% fresh and 80% processed and boxed?
Perhaps only 20% of your friends are quality friends. What are you going to do about the other 80%? Maybe 80% of the population is clueless, and 20% care about what is happening in this country. Perhaps only 20% do research, while 80% get their information from news and social media.
Then, of course, you could break it down even further if you wanted to. Let us use a previous example as a point of reference. Let’s say that only 20% of the population cares about what is going on in this country. Of that 20%, it would be safe to say that only 20% of that original 20% (4%) would ever do anything about it, and the remaining 80% of that original 20% (16%) would support that group. Look to the Revolutionary War for clarification and proof of this point. It’s insane how crazy accurate this can be.
The point is that knowing this simple principle can change how much of the world looks. It also gives you a strong starting point to research or “guesstimate.” I like to use this to demonstrate how specific government programs will never work as intended. That is to say that there is an 80% chance that it will not go as planned or promised. Let us look at ObamaCare for a second. 80% of the people were essentially penalized for the sake of the other 20%. Play around with it. You’ll be amazed at how it can change your perspectives. Play around with it.
There are a couple of things to consider. However, it is essential to have some (actual) facts when applying the 80/20 rule. You don’t want to assume too much because you’ll be considerably off if you’re wrong. Let me demonstrate.
QUESTION: What percentage of people are generally good people?
Most folks would assume that 80% of people are generally good, right? Granted, good is a relative term. However, with some research, we can find interesting data that will probably alter your perspective and give us a better idea of reality. An example here might be that 80% of people see nothing wrong with stealing from their workplace (Derbyshire, 2009). Of course, 80% of people who read this and steal from their employer are probably figuring out a way to justify it, while the other 20% do not care and are proud of their embezzlements.
Regardless, we can expand upon this even more. For example, it would be a safe bet to say that the example provided did not change the mind of 20% of the people who still believe that 80% of all people are good. But if that perception were accurate, why would 80 percent of organizations now have to provide codes of ethics to guide employees regarding ethical standards in their work (Gioia, 2012)?
Do you see what I mean? Now let me ask the first question again. What percentage of Americans own what percentage of firearms? I would bet that most Americans would assume that 80% of Americans own a gun. That might have been the case at some point, but I would probably bet that only 20% of Americans own firearms.
Let’s do some research and find out. While we will likely never know the actual figures, here are some things to chew on. Let’s start with some simple statistics. Over 393 million guns are in the hands of civilians. That’s probably nearly 80% of all firearms in the U.S. when you contrast the military, law enforcement, etc. Now, that equates to about 120 firearms per 100 citizens. That’s a lot of guns! When we dig into it, we find that not all citizens own guns, some only own one gun, but most gun-owning Americans have about five firearms.
When we tabulate the actual data, we get pretty close.
- Nearly 20% of gun owners have only a single firearm.
- Almost 80% of gun owners have multiple firearms.
- Roughly 20% of Americans report owning a firearm.
- This means approximately 80% of Americans do not own a firearm.
Now, something to think about is when things shift. At one point, 80% of Americans owned firearms. Of course, this has shifted as people moved into the cities and as regulations mounted. However, this shift did not happen overnight. In the middle of that shift, it was 50/50, 40/60, 30/70, etc. So, when you find a percentage that does not follow this principle, it could be a clue that something is changing or unsustainable. Sure, it could be a true solid split or show a swing that needs further research. Either way, this principle helps us apply projection or strategically forecast a direction that will likely get close to 80/20 or 20/80.
Allow me to address extremes for a moment. Let’s say that 95% of your profits come from only 5% of your clients. Your business might be in danger. When the extremes happen, you could use the data to help identify the problem or anomaly. In this instance, you may need more clients. Or, you may have workers that are driving away business. Or, let’s say that 95% of your results come from 5% of your workers. You probably need to train better or find better workers – and then give that 5% a raise.
Let me stress that this principle is not perfect and does not work in every scenario. Understand that I am sharing this because it can be a handy tool to help you get close or find a starting point. Sometimes you will find a 60/40 split or even 70/30, etc. That’s okay. It happens. Or, even better, there are times when you will guess 80, but that truth is in the 20. Great! You’ll learn something. Regardless of these occurrences, it can be a handy tool to help you navigate your life a little better.
I will leave you with a few interesting things I found during this article’s research. Did you know that approximately 80% of all crime is committed by 20% of all criminals? Did you know that 80% of homicides are gang-related? Or, did you know that around 80% of gun owners are men (but this may be shifting)? Finally, did you know that women initiate 80% of all divorces?
It never ends!!! Pareto’s Principle is a powerful tool. Enjoy!
- Derbyshire, D. (2009, Sept 7). How 80% think it’s okay to steal from work as study reveals our wavering moral compass. Retrieved from http://www.dailymail.co.uk/sciencetech/article-1211629/How-80-think-OK-steal-work-study-reveals-wavering-moral-compass.html
- Gioia, J. (2012, June 13). Pressure to act unethically is on the rise. Retrieved from http://www.hermangroup.com/alert/archive_6-13-2012.html