The 80-20 rule, also known as the Pareto Principle, is an aphorism which asserts that 80% of outcomes result from 20% of all causes for any given event.
The widely know and used approach on identifying where the money is for the business, it might comes even 🖐 (handier) in times of uncertainty and all the companies moving towards a (new) normal shortly.
In business, a goal of the 80-20 rule is to identify inputs that are potentially the most productive and make them the priority.
Although the 80-20 accepted truth is frequently used in business and economics, the concept can virtually be applied to any field. Bearing always in mind that this “rule” is a precept, not a hard-and-fast mathematical law.
Understanding the 80/20 principle
We might look at the 80-20 rule as simple cause and effect: 80% of outcomes come from 20% of causes.
The principle is often used to point out that 80% of a company’s revenue is generated by 20% of its customers, hence a vast majority of companies focus on the so called 🔑 (key) accounts.
Where the company strategy is as such , then it might be advantageous to focus on the 20% of clients that are responsible for 80% of revenues and market specifically to them, to retain them , and acquire new customers with similar characteristics.
The Principle in one sentence
The 80-20 rule is about identifying an entity’s best assets and using them efficiently to create maximum return value.
When is understood incorrectly
The 80-20 rule is a precept, not a hard-and-fast mathematical law.
The 80-20 rule is misinterpreted often. Sometimes the misunderstanding is the result of a logical mistake for example , if 20% of inputs are most important, then the other 80% must not be important.
What are the benefits of the 80-20 Rule
Although there is little scientific analysis that either proves or disproves the rule’s validity, there is much proven evidence that supports the rule as being essentially valid.
Performance results of a wide range of businesses have demonstrated success by incorporating the 80-20 rule.