Understanding the 80/20 Rule

Sometimes known as the Pareto Principle, the 80/20 Rule is a matter of cause and effect.  It’s a phenomenon that we see, not only in business, but also life in general, which suggests that 80% of the effect is produced by 20% of the cause.  The cause being why something happens and the effect is a result of the cause. For example, “I work hard, therefore I’ve made a lot of money”.  Working hard is the cause, making money is the effect.

Understanding the theory behind the 80/20 Rule helps us to understand certain things in business.  Some companies believe that 80% of their profits comes from 20% of their customers.  Others believe that 80% of the work is done by 20% of their employees.  When analyzing sales, it is often determined that 80% of a company’s revenue is generated by 20% of its products.

This rule doesn’t always apply, as we all know that business is not an exact science.  However, it poses an interesting assumption that makes us view the inner workings of our companies a little differently.  If you’ve never heard of the 80/20 Rule, this type of analysis may never cross your mind.  Although, think about how differently you would run your business if you were able to identify which percentage of your products were making you the most money or which employees are more productive than most of the others.

Pondering these questions could allow us to operate our businesses more efficiently and that’s what makes this rule so important.  What would you do with information that suggests 80% of your results is provided by 20% of your work?  If nothing else, it would help you to focus on what’s important and spend less time on what’s not.  Many things can be sorted out by utilizing the 80/20 Rule.  It’s not a solution to all of your business problems but it’s a good concept to have in your back pocket.

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