The 80/20 Rule: How Businesses Apply the Pareto Principle
Aug 30, 2022|Read time: 13 min.
- The Pareto principle states 80% of outcomes are produced by 20% of causes.
- The 80/20 rule helps marketers prioritize the channels that do most of the work.
- The 80/20 rule is the key to unlocking maximum ROI across many business disciplines.
To succeed in a competitive industry, marketers must be bold in prioritizing their spending to maximize return on investment (ROI). It’s not an easy process but it’s one that pays dividends in the long run. Thankfully, marketers can look to the Pareto principle (80/20 rule) for guidance.
As you’ll see below, following the Pareto principle in marketing often leads to identifying your most fruitful marketing channels and activities. For example, we know the organic search channel can outperform more expensive paid channels for a smaller investment.
In this article, you’ll learn how the Pareto principle works and, most important, how to make the 80/20 rule work for your business and marketing initiatives. It can also help you knock the most important items off your to-do list.
What is the 80/20 rule (Pareto principle)?
The 80/20 rule, or Pareto principle, states that 80% of outcomes are produced from 20% of causes. It’s also known as the principle of factor sparsity and the law of the vital few. The 80/20 rule can help people prioritize the actions that create the best results or greatest impact.
The 80/20 rule applies to many life, career, and in business applications. Although the Pareto rule isn’t an actual law, executives can still use this phenomenon to improve business performance. In any situation that calls for maximizing value, you ignore the 80/20 rule at your peril.
If you’ve ever heard claims like “80% of sales come from 20% of clients,” that’s Pareto through the sales and marketing lens.
How we apply the 80/20 rule in business
In business, whether you’re an entrepreneur or marketer, knowing what to prioritize can often prove more difficult than the work itself. By leveraging the 80/20 rule, you can prioritize the few tasks that generate the most bang for your buck without losing sight of the bigger picture. The 80/20 rule is perhaps the most effective prioritization tool and all it requires is adjusting your perspective and taking its lesson to heart.
Consider this: You’re a people manager in a small marketing firm. You have several direct reports that rely on you to help develop their careers. There are 10 things you can do to help them, but you’ve identified two — monthly performance reviews and career-building exercises — that are winning out.
What would you do? If you said double down on the 20% that’s delivering major results, you’re already a Pareto principle believer.
How does the 80/20 rule work?
As stated above, the 80/20 rule claims that a small minority of inputs (actions) create the majority of outputs (results). It’s cause-and-effect with a distribution. The exact distribution does not particularly matter and the percentage need not add up to 100%.
The 80/20 rule is simply a theory that a few important things often create most of the wished-for benefits. While we won’t be covering Pareto charts, just know that the principle provides a template for all kinds of applications.
General Pareto principle examples:
- 80% of news stories are based on 20% of world events
- A few ice cream flavors represent most of an ice cream shop’s sales
- 80% of investment gains are realized by 20% of investments
- A few popular iPhone apps make up most of the total App Store downloads
- 80% of social media shares are of 20% of posts.
- Microsoft discovered that 80% of the errors and crashes in Windows and Office could be attributed to 20% of bugs.
Why is the 80/20 rule called the Pareto principle?
The 80/20 rule is called the Pareto principle because it was inspired by the works of philosopher, civil engineer, and Italian economist Vilfredo Pareto. Vilfredo Pareto’s observations across many fields uncovered the paradox. Interestingly enough, Pareto’s first 80/20 rule observation started in his garden when he realized that 80% of his peas came from 20% of the pea pods.
Pareto also noticed this trend applied to the distribution of wealth. He observed that approximately 80% of the wealth in 19th century Italy tended to concentrate around 20% of the population (a Pareto distribution).
Long after Pareto’s death, engineer and management consultant Joseph M. Juran applied the 80/20 rule to manufacturing quality. He coined the phrase, “The vital few and the useful many” to further explain his Vilfredo Pareto-inspired findings and the rest is history.
The 80/20 rule is considered a universal principle because it applies in so many different cases, says the Juran Institute.
20% of an organization’s products may account for 80% of its profits, or 20% of team members may contribute to 80% of successful results in a given project. Pareto analysis can help identify which factors account for the greatest effects.
The Pareto principle jumped into the wider lexicon and took off. It’s possible to apply the 80/20 rule across fields like fitness, finance, marketing, self help, entrepreneurship, time management and so much more.
Pros and cons of the 80/20 rule in business
Regardless of your business, or specific discipline, you can often apply an 80/20 rule analysis to your efforts. It may not match up exactly with the 80/20 split but conceptually, the Pareto principle often rings true.
A few important tasks, actions, or marketing channels will deliver an outsized benefit for the effort or investment input. Knowing which is a game-changer. That’s why the 80/20 rule in business can be so powerful. That being said — there are definitely pros and cons to the 80/20 rule to consider.
Advantages of the 80/20 rule
In the context of business, the Pareto principle has massive upside. It can have an impact on just about all aspects of business, but a few major ones include:
- Marketing ROI – You can identify and prioritize the few marketing channels that create big wins.
- Sales – You can determine which sales targets offer the biggest opportunity and increase revenue strategically.
- Offerings – You can figure out which of your products or services drive the most revenue and prioritize accordingly.
- Profitability – You can identify the few revenue streams that generate the most profit and focus there.
- Productivity – Knowing which tasks to tackle across your business lets you focus on productivity drivers without losing sight of other contributing factors.
Disadvantages of the Pareto principle
The 80/20 rule is observable but that doesn’t mean it’s a mathematical law. Obviously, you should take any precept with a grain of salt because in business and life, things are always in flux. Variations occur, deviations are common, and entropy is king.
Some Pareto principle limitations include:
- Not applicable – There are situations that can turn the 80/20 rule on its head, cause it to reverse, or render it completely irrelevant. It’s a general principle, not a natural law like gravity.
- Past performance does not guarantee future performance – Pareto, and Dr. Joseph Juran for that matter, used the rule to analyze distributions in the past, which could be projected into the future. It’s important to note that this assumption that past results will continue is problematic.
A note on misinterpretation
User error is different from a disadvantage, but it can be easy to misinterpret the rule itself.
The most common error is to prioritize the 20% completely and ignore the other 80%. This is a recipe for disaster because you miss the big picture.
What if you neglected your smaller clients in favor of the major few that generate most of your revenue? You put the entire organization at risk. You’d create vulnerabilities, and lose your smaller clients, robbing your company of their growth potential as well.
How to apply the Pareto principle as a marketing leader
Marketing is a complex process with many moving parts and variables. But what if there was a way to better prioritize these components? To seek out the few actions that drive most of the wins? That’s where the Pareto principle comes in.
The process begins with identifying your top business priorities, then identifying the highest-impact channels, and finally, steering investment towards these priorities.
Below we’ll break each part into actionable steps.
Determine your top business priority
Before you can apply the 80/20 rule to your business, you must first identify your top priorities based on your medium and long-term goals.
Ideally, 80/20 priorities should be right in the middle size-wise. Too small and the task probably won’t drive results. Too big and the process can become unsustainable and unmanageable. Your industry, business size and stage, and other factors may also influence priorities.
For example, let’s say you’re the head of marketing for a large media website. Your editor-in-chief identified 10 news article ideas and presented the data behind each one to determine which should be prioritized. The team suggested three of the ideas will drive most of the traffic and conversions, while the others may be helpful but not result in huge wins.
Applying the Pareto principle here, your editors would assign your top writers and invest additional creative resources in those three pieces of content. You might also feature ads more prominently on these few articles. The website would still publish the other, less important posts as well, but apply less time and resources there.
This would help guarantee maximum return on your team and business’s time and resources, creating a situation where you applied the optimal input across all possible choices. It’s a great way to lower potential employee burnout as well. The 80/20 rule strategy can be applied to any particular business goal or desired outcome. At the end of this article, we’ll provide several more examples.
Identify the highest-impact channels
The 80/20 rule is a must for marketing professionals trying to determine which marketing channels have the best return on investment. The Pareto principle tells us, in general, that a few channels are going to do most of the work. It also says not to neglect the other, less impactful channels.
As a marketer, you would first collect data across your selected channels. Ask yourself:
- Which of these are producing the most return on your spend?
- Are there other channels you could be leveraging that also offer better returns on average?
If you analyze this data according to 80/20, you’d find that a few channels are most effective. Then, use these insights to prioritize your marketing spend around the most efficient channels.
For example, several studies have revealed how the organic search channel delivers more customers at a lower cost than paid channels. Terakeet clients have even seen up to 12 times the ROI of paid search after investing in a holistic SEO strategy.
Terakeet clients have even seen up to 12 times the ROI of paid search after investing in organic search strategies.Terakeet
Although businesses should use every relevant marketing channel, organic search is one of those “vital few” channels with the highest marketing ROI.
In a marketplace where online visibility and owning your industry’s conversations is a mark of success, it’s not a surprise to see organic search leading in this way. It’s an important piece in any marketing mix that can provide an outstanding impact compared to its cost.
Think big and invest bigger
Knowing your most important business priorities, identifying the 80/20, and determining how to get there is key, but the ultimate utility of the Pareto principle is identifying where and how much to invest (both amount of time and money).
Once you reach an 80/20 conclusion, it’s time to set large goals and make an investment that aligns with those goals. The Pareto effect can have a profound impact in business and even change your life.
Thinking big and investing bigger, of course, depends on many other factors, and it’s not that simple. Our goal is just to give you the conceptual framework to show what 80/20 thinking looks like in practice. Now, let’s get into some examples of Pareto principle decision-making in sales, marketing, and more.
Pareto principle examples in business management
The Pareto principle and related analysis are almost universally applicable, but there are a few specific business disciplines that lend themselves well to 80/20. The following are hypotheticals that might come up as a professional and how the 80/20 rule applies.
Example of 80/20 rule in sales
In sales, knowing your target customer is highly important and knowing which customer segments provide the most value for your time is key. This is where the Pareto principle can be useful.
When analyzing past sales performance, it’s likely that a few major accounts generated a large proportion of annual revenue. You might find that out of several insurance clients, two large doctor’s offices, have outperformed your other clients combined. A basic analysis would indicate that while you need the less profitable clients, you should put more effort into selling to more healthcare clients.
So, in this case, you can use 80/20 to set a goal for your entire sales team. By industry, medical would be prioritized as the 20% that generates 80% of revenue. With less work (less overall sales but focused on medical practices), you could massively scale your operations and specialize in servicing these high-value clients.
Example of the Pareto principle in business strategy
In the business strategy field, 80/20 is also highly relevant. C-suite members tasked with budget allocation and prioritizing projects at a high level can determine where their limited attention should be focused. No company can do everything, and that means leadership must be shrewd and selective about priorities.
With the 80/20 rule in mind, leaders can separate the vital projects from the important but less pressing projects. For example, a company in a high growth stage could invest in several things: a new office, a new manufacturing facility, warehousing, supply chain optimization, hiring, and/or productivity consultants.
All of these are important, but let’s say hypothetically you know the business is struggling to meet demand and productivity is lagging behind.
Applying 80/20 tells you that your two top priorities should be a new manufacturing facility and productivity consultants. Those few items would have a massive positive impact versus the other choices, demonstrating the 20% (approximately) that creates most of the upside.
Example of 80/20 rule in marketing
We’ve covered a few examples of the Pareto principle as it applies to marketing, but here’s another more specific example.
Your team has recently discovered the value of video content as internal marketers. You’ve posted dozens of videos to varying degrees of success. But most of your views and conversions come from brief industry trend countdown videos and narrowly focused tutorials. While these are top performers, the other content builds brand awareness but doesn’t drive conversion clicks.
Applying the Pareto principle here means you would double down on the trend and tutorial videos, which are bringing in the most value. You’d also continue the lower-value content but invest the least amount of resources into them or produce fewer per month in lieu of a tutorial video. You’d have your video production staff prioritize the trend and tutorial videos without neglecting the other content.
Example of 80/20 rule in customer service
We can also use the 80/20 principle to optimize the customer service process.
As a customer operations manager, you notice that most of the customer complaints fall into two main categories. One is confusion about your company’s website user interface and the other is about a lack of information about products.
Taking the 80/20 perspective, you conclude that 80% of the complaints are because of two website problems. You then can notify the other internal teams that fixing the confusing website and launching a detailed FAQ page would lower outreach but also improve customer experience and retention. The power of the 80/20 rule is very clear in this case as it helps you not only diagnose, but fix, the problem.
Across business and personal life, the Pareto principle or 80/20 rule has proven its effectiveness. The idea that 80% of effects come from just 20% of root causes may seem paradoxical. The more data you look at and the more you apply it to real-world problems, the more you’ll notice interesting patterns that support its claim.
Next time you face a prioritization problem, try to apply the Pareto principle, and you may be pleasantly surprised at the outcome.
Pareto principle FAQs
The 80/20 rule, or Pareto principle, simply states that 80% of outcomes are produced from 20% of causes. It’s also known as the principle of factor sparsity and the law of the vital few. The 80/20 rule can help people prioritize the actions that create the best results or greatest impact.
In business, the Pareto principle, or 80/20 rule, can be applied to just about any tough decision that requires prioritizing the most important action one can take. It helps business leaders determine which activities generate the most upside with the least amount of input. With the 80/20 rule, business leaders can create the optimal use of resources to achieve their goals.