The 80/20 principle (Pareto)

Richard Koch’s 1997 reinterpretation, The 80/20 Principle: The Secret of Achieving More with Less, notes that the familiar story about peas and pods appears to be apocryphal. There is no clear record of Pareto himself stating the 80/20 ratio in that form.

When to use it

Use the principle when prioritising a business mix. Investigate the segments that create most of the value before spending equal effort on the long tail that contributes only 20 per cent.

Origins

The principle is named for Italian economist Vilfredo Pareto, whose work documented highly unequal distributions of land, income and wealth. Pareto developed a mathematical relationship between the proportion of a population and the wealth it held, and observed similarly skewed patterns across places and periods.

Quality pioneer Joseph M. Juran later applied the idea to operational problems, describing the ‘vital few’ causes responsible for a disproportionate share of defects. The popular 80/20 label became a convenient shorthand for this recurring imbalance, not a universal law or a ratio that must total exactly in every case.

What it is

The principle says that a relatively small share of causes often accounts for a large share of results. The horticultural illustration claims that roughly 80 per cent of peas come from 20 per cent of pods, but the important idea is the unevenness, not the garden story.

The Pareto principle

Common business hypotheses include:

• 80 per cent of sales may come from 20 per cent of products.
• 80 per cent of profit may come from 20 per cent of customers.
• 80 per cent of complaints may come from 20 per cent of causes or accounts.
• 80 per cent of sales may be generated by 20 per cent of the sales force.
• 20 per cent of inputs, causes or effort may produce 80 per cent of outputs, consequences or results.

These statements are prompts to measure concentration. They are not assumptions to enter as data. The actual distribution may be milder, stronger or structurally different.