80/20 Rule – Vilfredo Pareto Principle

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80/20 Rule - Vilfredo Pareto Principle
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The Pareto principle also known as the 80/20 rule, the law of the vital few, or the principle of factor sparsity states that, for many events, roughly 80% of the effects come from 20% of the causes. Essentially, Pareto showed that approximately 80% of the land in Italy was owned by 20% of the population; Pareto developed the principle by observing that about 20% of the peapods in his garden contained 80% of the peas. 

It is a common rule of thumb in business; e.g., “80% of your sales come from 20% of your clients.” Mathematically, the 80/20 rule is roughly followed by a power law distribution also known as a Pareto distribution for a particular set of parameters.

 

BUSINESS

The distribution is claimed to appear in several different aspects relevant to entrepreneurs and business managers. For example:

  • 80% of problems can be attributed to 20% of causes.
  • 80% of a company’s profits come from 20% of its customers
  • Moreover, 80% of a company’s complaints come from 20% of its customers
  • 80% of a company’s profits come from 20% of the time its staff spent
  • 80% of a company’s revenue comes from 20% of its products
  • And, 80% of a company’s sales are made by 20% of its sales staff

9 thoughts on “80/20 Rule – Vilfredo Pareto Principle

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