80-20 Rule

The 80-20 rule, also known as the Pareto Principle, is an aphorism which asserts that 80% of outcomes (or outputs) result from 20% of all causes (or inputs) for any given event. In business, a goal of the 80-20 rule is to identify inputs that are potentially the most productive and make them the priority. For instance, once managers identify factors that are critical to their company’s success, they should give those factors the most focus.

Although the 80-20 axiom is frequently used in business and economics, you can apply the concept to any field—such as wealth distribution, personal finance, spending habits, and even infidelity in personal relationships.

The Pareto Principle (80-20 Rule)

Key Takeaways

• The 80-20 rule maintains that 80% of outcomes (outputs) come from 20% of causes (inputs).
• In the 80-20 rule, you prioritize the 20% of factors that will produce the best results.
• A principle of the 80-20 rule is to identify an entity’s best assets and use them efficiently to create maximum value.
• This “rule” is a precept, not a hard-and-fast mathematical law.

Understanding the 80-20 Rule 

You may think of the 80-20 rule as simple cause and effect: 80% of outcomes (outputs) come from 20% of causes (inputs). The rule is often used to point out that 80% of a company’s revenue is generated by 20% of its customers. Viewed in this way, then it might be advantageous for a company to focus on the 20% of clients that are responsible for 80% of revenues and market specifically to them—to help retain those clients, and acquire new clients with similar characteristics.

Core Principle 

At its core, the 80-20 rule is about identifying an entity’s best assets and using them efficiently to create maximum value. For example, a student should try to identify which parts of a textbook will create the most benefit for an upcoming exam and focus on those first. This does not imply, however, that the student should ignore the other parts of the textbook.

Often Misinterpreted 

The 80-20 rule is a precept, not a hard-and-fast mathematical law. In the rule, it is a coincidence that 80% and 20% equal 100%. Inputs and outputs simply represent different units, so the percentage of inputs and outputs does not need to equal 100%.

The 80-20 rule is misinterpreted often. Sometimes the misunderstanding is the result of a logical fallacy—namely, that if 20% of inputs are most important, then the other 80% must not be important. At other times, the confusion stems from the coincidental 100% sum.

Business managers from all industries use the 80-20 rule to help narrow their focus and identify those issues that cause the most problems in their departments and organizations.