Book: 80/20 Principle: The Secret of achieving more with less
Subject Area: Productivity & Effectiveness
Post number: 6

English version:


The 80/20 Principle states that there is a inbuilt imbalance between causes and effects. A Majority has a small impact and a small minority has a major and dominant impact. Out of 100% of the population, 20% of it will cause the 80% of criminal trouble. 20% of the medicines make 80% of the profit in the Pharmaceutical industry.

As a side note, another major impact of these small major events is documented by noted Researcher Nassim Nicholas Taleb in his book “The Black Swan”. He makes some interesting derivatives out of this extrapolation of thee Pareto principle on the issue of economy. Many people like to get small profits over time than a huge one time profit. And on the reverse They prefer losing money in a bulk that in small decrements.

Based on the 80/20 principle, one must learn to celebrate exceptional performance, rather than raise average efforts! Be Selective, Not exhaustive and focus your effort on the few things that you think you should excel.

The First instance of 80/20 principle applied to corporate success is in revolutionizing Data Quality. Usually 20% of the problems cause 80% of quality issues. The Reason 80/20 principle works best in business is because in effect it is possible to generate 80 percent of the profit with 20 percent of the expenditure!

The Art of 80/20 is not to control the output. But rather to watch and observe which way the wind is blowing and utilise it to our maximum benefit. It requires 80/20 Analysis (Analysing the actual facts and data) and 80/20 Thinking (Assuming the existence of the principle in any realm and acting accordingly).

Identify the product, customer, market segment and the competitive segment that the company makes the most profit. That is part of the core 20% of the company that is driving 80% of the profits. Usually competitive segment is identified by knowing the major competitor to the product! If a product has a different competitor in the market, then it belongs in its own competitive segment.

Customer profitability is the next thing. Two customers who give the same amount of business might still drive different profitability. One of them might be too demanding and exhaustive on the resources driving your profit margin low. Prioritizing and allocating resources to the customer who makes the most profit margin is essential!

The next application of the pareto law reveals that simple is beautiful and beneficial. Complex is ugly and just causes overhead. Because usually the 20% of the core business in simple, while the remaining 80% of it is unnecessarily complex, has a lot of managerial positions and is a waste of resources! Simple doesn’t NOT mean small! But unfortunately, Big tends to get ccomplex and requires conscious effort to keep it simple! In a corporation, there is always a war. The war between the trivial many and the vital few. Be Selective. Not everything has the same importance.

Marketing efforts should be focussed on the top 20% of the products. Service should be focussed on the top 20% of the customers. (Both decided based on profitability! Not on sheer volume). Always keep the core customers happy.

Lets look at the top 10 corporate uses of the Pareto principle in the next post.