The Pareto Principle

Why 20/60/20 is the new 80/20

June 08, 2023

Principle

The Pareto Principle (80/20 rule) was named after the Italian economist Vilfredo Pareto and suggests that 80% of consequences come from 20% of the causes [1]. Pareto originally observed as early as 1895 that a relatively small number of people (20%) owned most of the wealth (80%) [2].

This principle has since been found to apply in a wide range of situations, from business to personal productivity. For example, 20% of the customers make 80% of the profit for a business, whereas 80% of the customers make only 20% of the profit.

The Pareto Principle is so obvious and simple that you might wonder what all the fuss is about. After all, everyone knows it, right?

Here's what most people don't know - the 80/20 can be split again by 80/20:

  • 20% of your actions produce 80% of your results,

  • 4% of your actions produce 64% of your results, and

  • with just under 1% of your actions, you get a good 51% of your results.

Now it's up to you: Do you want to struggle with the 20% or get 80% of the results with minimal effort?

Method

So the theory is pretty simple. Here's how to apply the Pareto Principle it in 4 steps:

  1. Eliminate the "Bad 20": Identify the 20% that cause the most problems or require the most effort but contribute minimally to your results. Once identified, actively disengage yourself from these factors. This could mean ending relationships with problematic customers or toxic people.

  2. Automate the "Mid 60": The middle 60% should be automated or delegated. These factors are serviced but not actively promoted, allowing you to focus your energy on the most productive factors.

  3. Focus Your Energy on the "Good 20": The top 20% that produce 80% of your results should receive the majority of your attention and resources. These are your VIPs. Invest your energy into understanding their needs and problems and providing solutions for them. The goal is to increase the number of these "Good 20" factors.

  4. Repeat Regularly: At the end of each cycle (for example, annually), reassess your factors. Your previous "Good 20" should now be your new 100%, and you can then identify the new "Good 20", "Mid 60", and "Bad 20".

Remember, you are now at a much higher level than before. After a few iterations, this will really propel you forward.

Why It Works

The Pareto Principle works because it focuses on leveraging the most productive elements [2]. A study by Dunford et. al at the University of Plymouth found real-world evidence for this principle, such as the 2012 Forbes list and the world's gross domestic product [3]. The Pareto Principle helps us identify where our actions have the greatest impact, allowing us to use our resources more effectively.

Application Examples

The Pareto Principle can be applied in various areas, for example:

Business: Identify the 20% of your products that generate 80% of your revenue and focus on promoting and improving them. If you're developing a software product, focus on the 20% of features that are important to 80% of the users. If you have identified the 20% of your customers who are causing 80% of the trouble - actively disengage with them.

Education: If you're studying for an exam, focus on the 20% of the material which accounts for 80% of the questions (I give lectures, too, so not sure if I should really share this example 😉).

Eating Habits: Identify the 20% of foods that contribute to 80% of your nutritional intake. These are likely to be nutrient-dense foods that provide a large proportion of your vitamins, minerals, and other essential nutrients.

Examples by Giants

David Allen, the creator of the productivity method "Getting Things Done", uses a form of the Pareto Principle to guide time management. This method also is based on the idea that 20% of one's efforts can lead to 80% of the results, thus encouraging individuals to focus their attention on high-value tasks [4].

Charlie Munger, the vice chairman of Berkshire Hathaway and partner of Warren Buffett, embodies the Pareto Principle in his investment strategy. He holds a concentrated number of stocks that he knows extremely well, demonstrating that a small number of investments (the vital few) generate the majority of returns. His strategy of solving problems by addressing them backward also applies the Pareto Principle by focusing on avoiding the few mistakes that can have the most significant negative impact on performance [5].

Explained to Kids

Imagine you have 10 toys, but there are only 2 toys that you love and play with all the time. These 2 toys give you the most joy, even though they're only a small part of all your toys. Keep those 2, and give the other 8 away to other kids (maybe they will soon become their favorite toys!) That's what the Pareto Principle is all about - focusing on the things that give you the most results.

Remember that the Pareto Principle is a guideline, not a strict rule. The ratio may not always be exactly 80/20, or even 20/60/20. The key is to apply the principle repeatedly, thereby eliminating the bad 20%, automating the middle 60%, and making the top 20% your new 100% for the next iteration of applying the Pareto Principle.

Best,
Chris

Sources

Recommendations

[📚 Book] Getting Things Done: The Art of Stress-Free Productivity. https://www.amazon.de/Getting-Things-Done-Stress-Free-Productivity/dp/0143126563/

[⏯️ Video] The 80-20 Rule Explained (Pareto Principle) by MindYourDecisions. https://www.youtube.com/watch?v=F-I-BVqMiNI

[🎙️ Podcast] Richard Koch on Mastering the 80/20 Principle, Achieving Unreasonable Success, and The Art of Gambling by The Tim Ferriss Show. https://podcasts.apple.com/us/podcast/466-richard-koch-on-mastering-80-20-principle-achieving/id863897795?i=1000492157521 

[🎵 Music] The Gambler by Kenny Rogers. https://open.spotify.com/intl-de/track/5KqldkCunQ2rWxruMEtGh0 

[📈 Visual] Collection of Pareto Principle infographics. http://www.pareto-chart.com/8020-rule-infographics.html

[🛠️ Tool] Pareto Principle (80/20 Rule) & Pareto Analysis Guide by Juran. https://www.juran.com/blog/a-guide-to-the-pareto-principle-80-20-rule-pareto-analysis/