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The Pareto Principle
According to Wikipedia, The Pareto Principle (also known as the 80-20 Rule, the law of the vital few and the principle of factor sparsity) states that for many phenomena, 80% of the consequences stem from 20% of the causes.
The idea has rule-of-thumb application in many places, but it is commonly misused. For example, it is a misuse to state that a solution to a problem "fits the 80-20 rule" just because it fits 80% of the cases; it must be implied that this solution requires only 20% of the resources needed to solve all cases.
In layman's terms, the 80/20 Rule simply means that the relationship between input and output is rarely, if ever, balanced. When applied to activities, it means that approximately 20% of your efforts produce 80% of the results. Learning to recognize and then focus on that 20% is the key to success and also the key to effective time management.
The Pareto Principle was suggested by management thinker Joseph M. Juran. It was named after the Italian economist Vilfredo Pareto, who observed that 80% of income in Italy was received by 20% of the Italian population. The assumption is that most of the results in any situation are determined by a small number of causes.
This idea is often applied to data such as sales figures: "20% of clients are responsible for 80% of sales volume." Such a statement is testable, is likely to be approximately correct, and may be helpful in decision making. Richard Koch has written extensively on how to apply the principle in all walks of life.
Koch, a former management consultant and entrepreneur took the 80/20 Rule, adapted it to his personal and professional life and wrote a series of books on the topic beginning with 1998's "The 80/20 Principle: The Secret to Success by Achieving More with Less."
Koch has also used his concepts to make a fortune from several private equity investments made personally.
In his second book on the phenomenon, The Power Laws, he discusses the 80/20 principle as a basic principle for how the universe works, and sees the process of evolution, as described by Charles Darwin, as a special case of the 80/20 principle at work.
He also emphasizes that the 80/20 principle should not only be seen as method for making decisions or selections, but it should be combined with W. Brian Arthur's concepts of positive feedback and increasing returns.
In business, the 80/20 Rule can be applied in many different areas. For example:
* Supplies – 80% of your supplies comes from 20% of your vendors.
* Inventory - 80% of your product comes from 20% of your inventory.
* Sales Productivity – 80% of your sales come in from 20% of your sales force.
* Employees – 80% of the work will be done by 20% of the employees.
* Customers – 80% of sales will come from 20% of your customers.
* Complaints – 80% of complaints come from 20% of your customers.
* Advertising – 80% of business from advertising will come from 20% of the advertising.
It's important to keep in mind that the 80/20 rule is a ratio. This means, if the total selection is less, then the total sales will also be less.
The 80/20 Rule can also be applied to websites as well. For example, 80% of your traffic only visits 20% of the pages on your site.
And publishers of "How To" information have known for ages that 80% of those who purchase their products will never utilize the information.
Likewise, 80% of those who attend seminars to improve their lives will never utilize the information they obtained at the seminar.
In closing, Pareto's Principle, the 80/20 Rule, should serve as a daily reminder to focus 80% of your time and energy on the 20% of those activities that are really important. It's not enough to just "work smart", you also need to work smart on the right things.
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Originally Posted by jasaunders
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