Imagine living in a world where every worker contributed the same amount, every problem was equally important, and every product was equally popular with users. Planning would be so simple. In reality, however, the distribution is quite skewed. In most people‘s everyday routines, low-impact chores hijack a lot of their day. These activities can consume up to 80% of our time without having any meaningful impact on productivity. If you face similar issues, you might want to take a look at the Pareto principle. Also known as the 80/20 principle, it helps prioritize activities that really matter. 

In this blog, we discuss: 

 

What is the Pareto Principle?

The Pareto principle states that roughly 80% of the consequences come from 20% of the causes. In other words, a small minority of causes have a disproportionate effect on the outcome. This was named after its developer, the Italian economist Vilfredo Pareto, in 1896. Pareto noticed that 20% of the pea pods in his garden yielded 80% of the peas. Extending his observations beyond his garden, he observed that about 20% of the population owned 80% of the country‘s wealth. In terms of land ownership, a handful of wealthy citizens who made up 20% of the population owned 80% of the land. Decades later, management consultant Joseph Juran observed that the phenomenon identified by Pareto was a universal principle that consistently applied to a wide variety of fields including economics, commerce, management, and quality control. Juran discovered that 20% of the manufacturing processes were responsible for 80% of the product defects. Thus, by fine-tuning the production methods, overall product quality can be improved. His observations led him to coin the phrases “vital few” and “trivial many,” which meant prioritizing the “vital few” over the “trivial many” to achieve greater success. This was widely adopted as a strategy to identify the most significant factors across different departments, organizations, and business sectors. 

Importance of the Pareto Principle

As the Pareto Principle states, for most consumers, roughly 80% of the consequences come from 20% of the causes; it conveys that a small percentage of causes often have outsized outcomes. Understanding this concept can allow professionals to identify which initiatives should be prioritized to make the greatest impact. For example, think of a new CEO who has recently been hired to boost client retention for a small business. In this case, if 80% of the reason why their clients are leaving is coming from 20% of the existing concerns, it would be a no-brainer to focus on the first 20%. To better understand the importance of the Pareto Principle and how it may influence industries, let’s take a look at its benefits and limitations. 

Benefits and Limitations

Let’s start with the benefits: 

Benefits of the Pareto Principle

Efficiency enhancement

  • The Pareto principle serves as a guiding principle for maximizing efficiency. 
  • By identifying the vital few factors that contribute significantly to the outcomes, individuals and organizations can focus their efforts on tasks that actually require more attention and are more impactful. 

Better resource management

  • Understanding that a small portion of inputs is influencing most of the outputs will allow managers to optimize resource allocation. 
  • This is especially crucial for businesses where resource, money, and time management are the primary motives. 

Smarter decision making

  • The Pareto principle can help organizations and business managers make the best business decisions during the problem-solving process. 
  • In situations where there are many potential causes behind a problem, the Pareto principle can help you turn your focus toward solutions. 
  • Here are a few steps for making the Pareto principle work for your organization: 
  • Identifying the problem that your team is facing 
  • Identifying the causes of this problem 
  • Categorizing problems into similar groups 
  • Assigning a value to each of these problems based on how they are impacting your business 
  • Developing a plan to resolve the top 20% of problems adversely affecting your business 
  • By following this succinct process, organizations and managers can make informed and actionable decisions that swiftly show results. 

Quality control becomes easier

  • The Pareto analysis and the Pareto chart are widely used by a number of top organizations for enhancing their quality control functions. 
  • This becomes possible as using a Pareto chart can help managers visualize their data and prioritize their actions. 
  • It helps minimize the amount of variation within a process and boosts the scope for increasing production. 

Limitations of the Pareto Principle

It may not always apply

  • The Pareto principle is not a mathematical law. 
  • Instead, it is a general principle, which clearly indicates that it does not apply in all cases. 
  • For example, natural variations of the Pareto principle may occur in numerous cases, such as 30% of your company’s sales professionals being responsible for 60% of your total sales. 
  • Apart from that, the Pareto principle can often be misinterpreted, as it may seemingly encourage professionals to focus on the top 20% of the concerns and completely forget about others—which may be a huge mistake. 

The Pareto principle only applies to the past

  • Evidently enough, in most cases, the Pareto principle is a reflection of the data and findings from the past. 
  • While it can always be a useful rule of thumb for planning, it rarely highlights future projections. 
  • This can come off as problematic, as even though past trends and performances can often influence future results, they may not always be relevant. 

May not be suitable for dynamic environments

  • This principle assumes that most environments are stable, while in most cases, the truth is the opposite. 
  • In rapidly changing, dynamic situations, the factors influencing outcomes may shift dramatically, making this principle hardly useful. 

Example of the Pareto Principle

  • To illustrate the practical application of the Pareto principle, consider a sales scenario. 
  • In many businesses, it’s common to observe that 80% of the sales come from 20% of the clients. 
  • By identifying this crucial 20%, a company can tailor its marketing strategies and customer relationship management to maximize revenue from these key clients. 
  • Similarly, in software development, the Pareto principle often manifests itself in the form of bugs. 
  • With nearly 80% of errors being traced back from 20% of the code, it’s safe to say that software development scenarios can often display Pareto efficiency. 

How you can use the 80/20 rule

  • The 80/20 rule can help organizations reap certain benefits, like boosting productivity, streamlining the decision-making process, and ensuring quality control. 
  • Let’s discuss how these goals can be achieved with the Pareto rule, a.k.a, 80/20 rule. 

Productivity

  • Applying Pareto’s observation to boost productivity will require managers to identify and focus on the most important tasks. 
  • Managers can begin by assessing their to-do lists and identifying the activities that contribute the most to their goals. 
  • In simpler words, it’s crucial to prioritize tasks and allocate time, resources, and effort to maintain and boost productivity. 

Decision making

  • For decision-making, the 80/20 rule encourages managers to prioritize factors that have the most significant influence on outcomes. 
  • It’s also important to evaluate the key variables and considerations in any decision and focus attention on those that will yield the most favorable results. 
  • This can streamline the decision-making process and prevent analysis paralysis. 

Quality control

  • Quality control processes can benefit from the Pareto analysis by focusing on identifying and rectifying the most critical defeats. 
  • With the right metrics, managers can optimize their project management efforts and address the 20% of root causes that contribute to 80% of the problems. 
  • Through this approach, organizations can efficiently optimize the amount of time and effort a task requires and deliver more in less time. 

Disadvantages of using the 80/20 rule

  • In the majority of cases, there are a number of mistakes that go along with the execution of Pareto’s principle. 
  • For example, organizations may often misinterpret that with 20% of the time and effort, they can also achieve the 80% qualified results that they would otherwise achieve with their usual effort. 
  • And that is incorrect. Similarly, some organizations and managers may also be tied up in the trap of oversimplification, referring to the use of the 80/20 rule. 
  • Such misconceptions can do more harm than benefit to any organization. As you look forward to getting the most value out of Pareto’s principle, make sure to note the following disadvantages: 

Risk of oversimplification

  • Relying solely on the 80/20 rule may lead to oversimplification of the complex issues. 
  • Some situations may require a more robust and well-planned approach instead of a simple and straight 80/20 execution. 

Neglecting long-term investments

  • The 80/20 rule often tends to focus more on short-term gains by looking at immediate, impactful factors. If not looked after thoroughly, this principle may end up causing harm in the long run. 
  • For optimum execution and results, managers must take note of both long-term and short-term factors influencing their company’s growth. 

Stagnation

  • Focusing excessively on the vital few may cause resistance to change. 
  • With the repetitive usage of the 80/20 rule, businesses or managers may start resisting the exploration of new avenues, which may result in lost opportunities and lead to stagnation. 
  • The fear of disruption in the current business state may be harmful to any business and must be avoided. 

What is the Pareto distribution?

Let‘s now understand what a Pareto distribution looks like. Consider an example of income distribution in a city. Below are three graphs that attempt to describe the distribution.   

Figure 1: (a) Uniform Distribution; (b) Normal Distribution; (c) Pareto Distribution; explaining the income distribution in a city 

The uniform distribution depicted in Figure 1(a) illustrates a situation where the population is evenly distributed across all income levels. The normal distribution shown in Figure 1(b) depicts a situation where the majority of the population’s income falls between income levels 4 to 6. However, studies indicate that income distribution follows a Pareto distribution, as shown in Figure 1(c), with the richest 20% of the population receiving the top 80% of income and the rest earning between income levels of 0 to 2.  

The Pareto distribution is very accurately described by the following equation:   

  • The equation represents a skewed distribution with a gradually decreasing tail, where the shape parameter α describes how quickly the slope decays and the scale parameter xm is the minimum possible value of x.  
  • Let’s take an example of wealth distribution that will help us understand the concept of shape parameter α better. 

Figure 2: Pareto curves for wealth distribution 

The graph depicts the distribution of wealth in the population. A higher value of α indicates that a smaller percentage of the population has a higher amount of wealth (or higher wealth disparity). For example, in Figure 2, the orange line illustrates the 90-10% distribution for α value of 1.05, showing that the wealthiest 10% of the population own 90% of the wealth. Similarly, the green line represents an 80/20 perfect Pareto distribution for α value of 1.16. Thus, the shape parameter α is also known as the Pareto index, which is a measure of the breadth of wealth in this case.  

The distribution has a wide range of applications that describe social, scientific, economic, and geophysical events in society, as well as quality control and actuarial in enterprises, among other things. 

What is Pareto chart?

While the Pareto distribution is an excellent statistical tool for understanding the Pareto principle, we will now look at a presentation style that aids in data visualization and interpretation by displaying the relative impact of all contributing components on the main problem.   

A Pareto chart contains both bar and line graphs, where the lengths of the bars generally represent the importance of different situations, and the line represents the cumulative total. The bars are arranged in decreasing order, with the longest bars on the left and the shortest on the right. In this way, the chart graphically depicts which scenarios are the most significant sources of the issue.  

Consider the following simple Pareto chart, which depicts the distribution of some prevalent software defects. The left vertical axis represents the frequency of occurrence, while the right vertical axis depicts the cumulative percentage of the total number of occurrences.  

Figure 3: Pareto chart showing the relative frequency of software issues 

Functional defects have the most frequent occurrence, with 700 defects covering approximately 50% of issues. Performance problems are the next most frequent occurrence, with 500 reported problems, both functional and performance issues, leading to a cumulative contribution of 80% (see the red-colored line, looking at the right vertical axis).  

As Figure 3 shows, the first two bars are the tallest and account for a considerable proportion of all the defects. The cumulative chart (red line) also increases rapidly at first and then levels out, demonstrating the Pareto principle in action. The top two categories account for roughly 80% of all defects, and hence, fixing those should be prioritized over others.  

Some common misconceptions

Due to its simplicity, the concept of the Pareto principle is frequently misunderstood and results in several misconceptions. Below are some common myths associated with this principle:  

Myth 1: It is a mathematical law  

The 80/20 rule is a general observation rather than a formal mathematical equation. Furthermore, the law can be misinterpreted such that if 20% of inputs are more important, then the remaining 80% can be ignored. This is a logical fallacy. In the chart shown in Figure 3, while we may prioritize efforts to fix 30% of the most frequently occurring bugs, the remaining 70% should not be neglected.   

Myth 2: The numbers 20 and 80 must add up to 100:  

It is a common misconception that the numbers 20 and 80 that represent the distribution must always add up to 100. However, that is not always the case. Inputs and outputs simply represent different units, and they could be 80/30, 90/20, etc. The percentages of these units don’t have to add up to 100.   

Myth 3: It can be used to accurately predict the future:  

The Pareto principle only focuses on historical data, making it a useful tool for planning, but it makes no predictions for the future. While past performance can be a good indicator of future performance, it’s not a guarantee that it will be relevant in future scenarios. When formulating new strategies, the Pareto principle may not always be applicable as circumstances can change and evolve over time. 

Real-world examples

The Pareto principle is widely used in various domains. Below are some examples:  

In marketing and sales, knowing that 20% of advertisements generate 80% of sales traffic can be used to improve future marketing efforts.   

In software development, the Pareto principle can be used to identify a small subset of bugs that contribute to the maximum number of crashes. This can help prioritize fixes for the most prevalent cases while safeguarding the system from the vast majority of outages.   

Surprisingly, almost all sports adhere to the Pareto principle. Regardless of the sport, the leading players are responsible for the majority of the wins. The Pareto principle stood up well in baseball, where 15 percent of the top players accounted for 85 percent of total victories. Similarly, in cricket, the leading 20% of players receive 80% of the success and compensation.   

Digitate ignio analytics framework uses Pareto principle in many ways. It helps in data quality assessment, characterizing normal behavior, performing feature engineering, generating data summaries, assessing top contributors, among others. The Pareto principle often offers a very powerful lever to identify areas that need attention and thus helps narrow-down the focus for a deep-dive analysis.  

Concluding thoughts

The Pareto principle, developed in 1896, is still relevant as it does not regard the world as even and uniform. On the contrary, it acknowledges that most things are not distributed evenly. Some things contribute more than others, and hence priorities should be established to maximize the impact. As a result, it has become a powerful tool that is used across industries. However, keep in mind that the Pareto principle is not a one-size-fits-all solution. It is merely an observation and not a mathematical law.