The 80-20 Principle – Pareto’s Principle

How it came along? 

It was first proposed by the Italian economist Vilfred Pareto in 1906. He created a mathematical formula to describe the unequal distribution of wealth in the country. He observed that 20% of the people owned 80% of the wealth. Much later in the late 1940’s Dr. Joseph M. Juran proposed the “vital few trivial many principle”. This theory basically proposes that 20 percent of things are always responsible for 80% of the results. Moreover the principle came to be known as Pareto’s principle partly because the earlier work of Dr. Juran wasn’t clear and people thought he was applying Pareto’s Economic theory in a broader aspect and partly because Pareto’s principle sounded better than Juran’s principle.

What does it mean?

It means that 80 percent of all the things you achieve are because of 20 percent of all the things you’ve been doing. Further many things can be taken out of it. 20 percent of your work may be consuming 80 percent of your time. Managers spend only 20% of their time to complete 80% of their work, and 80% of a company’s business comes from 20% of its customers. 80 percent of your losses could be because of 20 percent of your business. 20 percent of your stocks may be taking 80 percent of your warehouse. 80 percent of your sales may be due to 20 percent of your products. 80 percent of business growth may be due to 20 percent of your employees. One can apply this principle in any aspect of work or life.

How to use it?

First we have to write down what are the main factors that are directly related to the problem or in general the question that is involved. If more than one factor is due to the same thing then count it as one single generic factor. Let us learn from a simple example. 

Consider the contribution to the monthly household expense by various payments that should be considered. The major payments can be taken as:

House Rent- 10000

Electricity Bill- 500

Car Petrol Bill-1000

Telephone Bill-500

Child’s School Fees-1000

 We then chart it out and observe the contribution made by each. In the example below we observe that out of the total expenditure of Rs.13000 house rent itself amounts to Rs.10000 which is almost 77% of the total expenditure. Moreover it is just one out of the 5 factors making 20 percent of the total factors. Thus we observe that in this case also 20 percent of the factor is contributing to 80 percent of the expense.

Thus we observe that 80-20 principle can in general be applied to any day-to-day problem and with proper analysis one can prioritize his course of action for better returns and efficient functioning.

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