Essentially, Pareto’s Principle describes one of the so-called “universal truths” that 80% of the total output comes only from 20% of the input.
Historical Background
In the late 19th century, economist/philosopher from Italy V. F. Damaso Pareto first proposed his theory that 80% of the total results from only 20% of the actions done for a given activity. This idea stems initially while he was out in the garden. As he was taking note of his harvest at that time, he realized that from the pea plants in the garden, only about 20% produced almost 80% of high-quality pea pods that he has harvested. This discovery led him to wonder if this imbalance of inputs and outputs also applies to other areas.
To do this, he focused first on the obviously uneven wealth distribution in their country at the time. Upon examining the records of land ownership, he found out that from the aggregate population, only 20% owned 80% of all the lands that can be owned by private citizens. Furthermore, he realized that only a vital few — the top 20% of the population — holds the power over the trivial many, or the bottom 80% of the country’s population.
Searching for more proof, he turned his focus towards the different industries. He was pleased to learn that his theory continued to hold up. According to the data he has gathered, 80% of the total production for a given industry was generated by only 20% of the companies within that said industry. This observation remains consistent across various fields, so he concluded that his theory could be considered a generality.
Pareto’s Principle in Action
Pareto’s Principle is one of the most widely known concepts in business and economics. While the ratio is not always exactly 80:20, the logic behind this imbalance stands firm across different situations. For example:
● In the field of sales and marketing, only 20% of the total number of agents manage to generate 80% of the gross sales for a given period.
● A catering company observed that 80% of its profits come from only 20% of the clients they have handled.
● Software engineers of a particular word processing app noted that 20% of the reported software bugs have caused nearly 80% of the crashes of their software.
● The Department of Health reviewed its statistical data for a given year and discovered that 80% of the total spending on healthcare can be accounted to only 20% of the total population.
● Business executives have also noted the importance of applying the Pareto Principe in overcoming the challenges of having limited resources. Given the scope of their responsibilities, they do not only have to manage their own time but also of their respective teams. Rather than aim for the impossible, the Pareto Principle allows them to figure out the priorities that would give them the most results. As for the rest of their probable goals, they could just put them aside for the time being, or even discard them completely.
● Many freelancers are using this principle sometimes without even realizing it. Since not all freelancers are fortunate enough to have a steady stream of work, they have to smart about choosing their clients. Aside from financial gains, it is also important for them to select only a few, but well-paying clients because having too many bosses at a given time can increase the likelihood of being burnt out.
● Given their nature, entrepreneurs are always tempted to go after and push through business ideas that may or may not pan out. To avoid wasting time and capital, some entrepreneurs apply this principle in order to determine whether or not a business is worth pursuing. After all, it is perfectly alright to take calculated risks, especially in business. However, this does not mean that they would have to witness all their efforts to go down the drain just because they do not know when to keep fighting and when to call it off.
