The Pareto principle, also known as the 80/20 rule, is a theory maintaining that 80 percent of the output from a given situation or system is determined by 20 percent of the input.
The principle doesn’t stipulate that all situations will demonstrate that precise ratio – it refers to a typical distribution. More generally, the principle can be interpreted to say that a minority of inputs results in the majority of outputs.
Here are a few examples of the Pareto principle in action:
- 20 percent of employees produce 80 percent of a company’s results.
- 20 percent of a given employee’s time yields 80 percent of their output.
- 20 percent of software bugs cause 80 percent of the software’s failures.
- 20 percent of a company’s investments produce 80 percent of its investment profits.
The principle is named for Vilfredo Pareto, an Italian economist. In 1906, Pareto noted that 20 percent of the population in Italy owned 80 percent of the property. He proposed that this ratio could be found many places in the physical world and theorized it might indicate a natural law.
In the 1940s, Pareto’s theory was advanced by Dr. Joseph Juran, an American electrical engineer who is widely credited with being the father of quality control. It was Dr. Juran who decided to call the 80/20 ratio the "The Pareto Principle." Applying the Pareto Principle to business metrics helps to separate the "vital few" (the 20 percent that has the most impact) from the "useful many" (the other 80 percent).
Applications of the Pareto principle:
A Pareto chart illustrates the Pareto principle by mapping frequency, with the assumption that the more frequently something happens, the more impact it has on outcome.
Pareto efficiency is a balance of resource distribution such that one individual’s lot cannot be improved without impairing the lot of another individual.
A Pareto improvement is assistance that benefits one individual without causing impairment to another.
Another application of the Pareto principle is the 96-minute rule, which maintains that knowledge workers should devote themselves to their most important tasks for that time period each day to improve productivity.
Understanding the Pareto Principle (The 80/20 Rule)