8/13/2017 80-20 Rule

80-20 Rule
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What is the '80-20 Rule'

The 80-20 rule is a rule of thumb that states that 80% of outcomes can be
attributed to 20% of all causes for a given event. In business, the 80-20 is NEW
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o en used to point out that 80% of Topics
a company's Reference Advisors
revenue is generated Markets
by 20% Simulator Academy

of its total customers. Therefore, the rule is used to help managers identify
and determine which operating factors are most important and should
receive the most attention, based on an e icient use of resources.
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BREAKING DOWN '80-20 Rule'
The 80-20 rule is also known as the Pareto principle,
principle, the principle of factor
sparsity and the law of the vital few. At its core, the 80-20 rule is a statistical
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distribution of data that says that 80% of a specific event can be explained by
20% of the total observations.

The 80-20 rule was first introduced by Italian economist Vilfredo Pareto, who, in 1906, observed that
80% of Italy's land was controlled by 20% of its population. From there, it was developed by Joseph

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8/13/2017 80-20 Rule

Juran, a 20th century figure in the study of management techniques and principles. Jurin took the
rule and applied it to a number of di erent facets of business and the economy. It is now used to
describe almost any type of output in the real world.

Real World Example of the 80-20 Rule

For example, the 80-20 rule in economics refer to the fact that 80% of a country's wealth is usually
controlled by 20% of its population, although this can sometimes be explained by the Gini index.
index.
Nigeria was found, on June 22, 2016, to have this exact distribution of wealth within its country's
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borders. The minimum yearly income needed to sustain a living in Nigeria was $1,000 as of June 22,
2016, yet more than 74% of the population lived below this poverty level.

This distribution came a er the country's population grew by 12% while its GDP rose by 54% from
2010 to 2014. However, the allocation of the increased wealth was not even, and it exacerbated the
income inequality, thus adding to the Pareto principle.
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Practical Application of the 80-20 Rule
The 80-20 rule is most commonly used for analyzing sales and marketing. If a company can identify
80-20 Rule
its highest-spending customers, it can e ectively market to them in order to retain existing
customers and acquire similar consumers. Therefore, companies should dissect their revenues and
understand
Pareto who makes up their top 20% of customers.
Principle

From there, it's been found that the top 4% of a customer base accounts for 64% of total sales,
Pareto Improvement
meaning that the more granular a company can get in its analysis, the more accurate the
understanding of its customers becomes. This then allows companies to launch targeted marketing
campaigns
Rule Of 70 aimed at resonating with the most impactful consumers.

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Uptick Rule

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The Pareto principle is a principle, named a er economist Vilfredo Pareto, that specifies an unequal
relationship between inputs and outputs. The principle states that 20% of the invested input is
responsible for 80% of the results obtained. Put another way, 80% of consequences stem from 20%
of the causes; this is also referred to as the "Pareto rule" or the "80/20 rule."!--break--This principle
serves as a general reminder that the relationship between inputs and outputs is not balanced. For
instance, the e orts of 20% of a corporation's sta could drive 80% of the firm's profits. In terms of

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personal time management, 80% of your work-related output could come from only 20% of your
time at work. In Pareto's case, he used the rule to explain how 80% of the wealth is controlled by
20% of the country's population.

Example of the Pareto Principle in Real Life

The Pareto principle can be applied in a wide range of areas such as manufacturing, management
and human resources.
resources. It has been adopted by a variety of coaching and customer relationship
management (CRM) so ware programs. A financial advisory business commonly uses the Pareto
principle to help manage its clients. The business is dependent on the advisor’s ability to provide
excellent customer service, as its fees rely on its customer’s satisfaction. However, not every client
provides the same amount of income to the advisor. If an advisory practice has 100 clients,
according to the Pareto principle, 80% of the financial advisor’s revenue should come from the top
20 clients. These 20 clients have the highest amount of assets and the highest fees charged.

The Pareto principle seems simple but is hard to implement for the typical financial advisor. The
principle suggests that since 20 clients are paying 80% of the total fees, they should receive at least
80% of the customer service. Advisors should spend most of their time cultivating the relationships
of their top 20 clients. However, as human nature suggests, this does not happen. Most advisors tend
to spread out their time and services without regard to a client’s status. If a client calls and has an
issue, the advisor deals accordingly, regardless of how much income the client actually brings in to
the advisor.

Advisory practices that have adopted the Pareto principle have seen improvement in time
management, productivity and overall client satisfaction. The principle has also led to advisors
focusing on replicating their top 20% of clients, knowing that adding a client of that size immediately
a ects the bottom line.

The Pareto principle can be applied to many businesses, especially those that are client-service
based. It can also be applied on a personal level. Time management is the most common use for the
Pareto principle, as most people tend to thinly spread out their time instead of focusing on the most
important tasks.

BREAKING DOWN 'Pareto Principle'

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BREAKING DOWN 'Pareto Principle'

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