Vilfredo Pareto was an Italian engineer, sociologist, economist, political scientist, and philosopher. He made numerous important contribution to economics.
One of the most profound contributions Pareto made is his study of the income distribution. He had discovered that individual’s income in a country follows a power law probability distribution from his observation that 80 percent of the land in Italy was owned by 20 percent of the population.
This pattern is then named after him as Pareto Principle, also known as the 80/20 rule that we’re familiar with.
Pareto’s Findings on Wealth Distribution
Pareto was born of an exiled noble Genoese family–his father was an Italian engineer and his mother, a French woman–in 1848 in Paris. After his graduation, Pareto worked as a civil engineer for some years. He then became a liberal, actively participating in political activities, while working as a lecturer in economics and management at the University of Florence.
Pareto did not begin serious work in economics and sociology until his mid-forties. He was always fascinated by the problem of power and wealth. At that time ( thnow), the gap between the rich and poor has been a consistent pattern of society condition.
Most people never questioned it, and most lived in their “fantasized” economics ideology. However, Pareto had more question about it:
- How people get it (power and wealth)?
- How is it distributed around society?
- How people who have it use it?
To figure out the answer, Pareto resolved to measure it. He gathered tons of data on wealth and income – tax records, contemporary rent income, personal income, etc. – through different countries and different centuries.
What he found was striking.
He plotted the data on a graph paper, with the income on one axis, and the number of people on the other axis. And he found that power and wealth weren’t distributed in a linear pattern, instead, it’s a reversed hockey-stick where a small percentage of the population own a majority of the wealth.
Furthermore, he saw the same pattern everywhere in every era.
The 80/20 Rule
In fact, the Pareto Principle doesn’t happen only in wealth distribution. If we take a closer look, the Pareto Principle, also known as the 80/20 rules appears in almost (but not all) every industry and scenario.
- In software. Microsoft stated that 80 percent of the errors and crashes in a system would be eliminated by fixing the top 20 percent of the most reported bugs. At the same time, Microsoft also noted that the top 1% of bugs cause half of all the errors.
- In sports. 20 percent of athletes participate in 80 percent of the big games, and out of these top athletes, 20 percent of them won 80 percent of the awards. You get to see this when you look at soccer. There are 77 nations have participated in the first 20 World Cup tournaments, only three countries – Brazil, Germany, and Italy — have won 13 out of the 20.
- In business. It said that 20 percent of the products or customers bring in 80 percent of the revenue. At the same time, a small group of organizations holds a big proportion of the market share.
There are inequalities everywhere. It could be a disadvantage, at the same time, an opportunity depends on how you see it. If you believe in equality and random distribution, it’s crucial to accept and embrace this hard truth.
But it also acts as a valuable insight for many of us–helping us to filter out unnecessary data, better channel our resources, and thus, making a better decision in work and life.
Implementing Pareto Principle
Most of us can’t control how the wealth is distributed, but we can still use the Pareto Principle to achieve better success in many areas of our life. There are three phases in implementing Pareto Principle in our life.
Phase I: Self-analysis
The first step to better channel our focus is to aware of where are our current focuses. Think of how you spend your time, the food you eat, the person you hang out with, and the decisions you constantly made. Keep track of how these decisions impact you in different areas of life.
At the same time, figure out the 80 percent of your accomplishments (or pleasure) and the 80 percent of your setbacks (or anything that doesn’t go well). Pinpointing these experiences helps you to find the source of these results.
Phase II: Identify the 20 Percent
After gaining a clearer picture of your activities and your results, connect the dots to link those (good or bad) results to the source of activities.
Just like how a small group of sportsman won the majority of the games, a small set of your daily habits and routines lead to the majority of the success you’re experiencing right now. And just like how a small set of bugs cause the majority of errors in software, there are a few destructive routines that lead you to failure again and again.
Phase III: Focus on the Fat Tail
What to do next is obvious now. Try eliminate or at least, minimize the destructive routines and focus your time and energy on the top 20 percent habits that lead to good progress.
How I Implement the Pareto Principle
It’s often easier to say than done. To give you a better understanding, here are a few examples of how I use the Pareto Principle in my daily life.
Self-awareness. I don’t take this piece of my life seriously before this, but now, it becomes the 20 percent of everything I do. Self-awareness is about understanding what you truly want, your strengths, and your weaknesses. With that, we get to stop comparing ourselves with the standard set by others, at the same time, walk away from the battle we can’t win.
Career. I tried many jobs and businesses in my life. These job experiences and business ventures help me to find things I enjoy doing the most. All of them taught me valuable lessons, but the one that I enjoy the most so far is writing. It’s also the skill that pays me well compared to many other skills. So I’m spending most of my time and energy on harness it now.
Productivity. To increase my productivity, I eliminate and delegate a bunch of tasks. I check email only once a day, I bundle my tasks based on their theme, and I stop making less important decisions like what to wear and what to eat by planning in advance. At the same time, I trim my daily to-do list using the Ivy Lee method by James Clear.
Relationship. If you pay a closer look, only 20 percent of your friends truly care about you, and that 20 percent also are those who impact you the most, at the same time, shape your beliefs, habits, and worldview. The truth is, only a small group of close friends contribute to all my happiness and growth, and thus, I decided to spend more time with them.
Fitness. I believe that everyone can get strong and fit by focusing on a few fundamental workouts. That’s why I only perform a few moves, three times a week in the gym, complementing with stretching and anaerobic training routine.
Diet. I was confused by diet. It’s tough. It’s just too much information about eating healthily. So I spent years to learn and experiment with it, just to simplify it (I practice intermittent fasting). I found that 80 percent of what we need daily comes from 20 percent of food selections. In fact, we don’t need too many choices for food. We often make poorer diet decisions when more options are available.
80/20 Strategies for Business and Organization
Now you’ve learned a few practical use of the Pareto Principle at an individual level. Let’s dive into a few examples of how this principle can be helpful in your organization of any size.
Pick only ONE goal for your organization. Having too many business goals divide your focus. Instead, have your vision lock on one sole purpose. It helps you make better business decisions and stop multitasking in the chaotic environment. Make sure your goal is progressive and measurable to keep your organization on track and grow beyond the goal when it’s achieved.
Optimize the first item in the funnel. When optimizing any funnels – sales, marketing, operation, recruitment, start from the first item that has cascading effects to the entire funnel. For an example, start optimizing your landing page to gain more high-quality leads for your business to improve sales. If your landing page (lead generation process) is weak, your business will suffer regardless how well prepared and trained your conversion process/team is.
Work hard to understand the attribution of your top 20 percent customers. It’s a common phenomenon in business that 80 percent of the revenue comes from 20 percent of the customers. Putting in the effort to understand the needs of your top customers is usually the most effective channel to spend your resources.
Create high margin products. Just like how your top 20 percent of your customers usually bring in 80 percent of your sales, this happens to your products too. One common strategy organizations are using is to create a premium product tier with a higher margin. Even though the sales volume for those products are lower, the profits are usually higher due to a higher margin.
When assessing risks, not all risks are equal. Risk management is incredibly important for an organization. The Pareto Principle pointed out that not all risks are equal. Set up systems to filter out unnecessary noise and prioritize critical issue in your business.
Why Winners (Almost) Take All
Imagine growing a new forest of 10,000 trees. Six months later, a few of those trees grow taller. The difference may be insignificant in the beginning. However, taller trees get better sunlight, at the same time, growing a wider, deeper spread roots to collect more water and better nutrients.
These little advantages help these trees to grow a little taller and bigger again, that eventually widen the gap of advantages they have over other shorter trees. With time, these are the only trees that survive because they become so tall to collect all the sunlight while the others die under their shades.
As Malcolm Gladwell pointed out in his book Outliers, successful people are usually the one with some sort of advantages and opportunities that others don’t, especially at the starting line. It doesn’t matter if these head-starts are small, it gets accumulated over the long run.
In Pareto Principle, the winner takes (almost) all. The-Winner-Take-All effect happens isn’t because winners are better, smarter, and stronger than everyone else. In fact, most of us started at about the same place. But that tiny little advantage can take a person a long way by compounding effect over time.
Small Improvement Matters
I’m not writing this to discourage you. Acknowledging the Pareto Principle, and the source of it, isn’t mean your life is doomed because you’re behind. Instead, I want to to see this as an advantage and acknowledge that small improvement does matter.
Putting the 80/20 rule to work in your life means better allocating your time and energy on things that deliver the best results. This simple act is an advantage. In fact, you don’t need to start big, remember?
All you need is progress. Improve yourself in a sustainable way; even it’s just 1 percent. It takes you a long way.