The 80/20 Rule
Untangling the Pareto Principle
By Sunjay Nath, MBA, BScE, CSP
 

Italian economist Vilfredo Pareto observed that 80 per cent of the land in Italy was owned by 20 per cent of the
population. Upon further research, Pareto concluded that
this trend was not an anomaly but, in fact, the norm in other countries. These observations were the basis for the Pareto Principle also known as the 80/20 Rule.

The illustrative potential of Pareto’s principle extends beyond understanding land ownership. Today, the concept is used to illustrate trends in everything from social to economic issues. You spend 80 per cent of your time with 20 per cent of your friends. Or, your business makes 80 per cent of your money from 20 per cent of your customers. These numbers have a strong intuitive appeal and we can easily relate to explanations and examples that use the 80/20 Rule.

I have a couple of issues that stem from two ways that the 80/20 Rule is often misinterpreted and misused. The first arises when the 80/20 Rule is used rigidly as 80 and 20. When quantifying human behaviours, it is often advantageous and necessary to involve degrees of flexibility and adapt the 80/20 Rule to the 90/10 Rule or the 73/27 Rule, depending on the circumstances and the groups involved. 

FLEXIBILITY IN NUMBERS
There is definitely a smaller group of people who control a disproportionately larger amount of power, land, money, experience, sales and so on. We cannot define the two groups, however, with exact numbers that are always as clean as 80 and 20. The 80/20 Rule is a useful way to imagine distribution, not an exact science. If the numbers 80 and 20 are expected to be exact, Pareto’s Principle becomes dangerous since it can produce oversights or under-preparation. Imagine only focusing on 20 per cent of your client base when, in reality, you ought to cater to 27 per cent of your client base? You would leave some good clients dissatisfied with your services and looking elsewhere. Remember that the two numbers are flexible.   

Mathematically, if 20 per cent controls 80 per cent then, by extension, 80 per cent should control 20 per cent. My second issue with Pareto’s Principle arises from this relationship. For some reason, people have a tendency to ignore the 80 per cent that controls the 20 per cent. Although this tunnel-vision perspective can be effective in some instances where prioritization of the 20 per cent is crucial, such a perspective can also lead to trouble. By slightly adjusting your approach and taking that 80 per cent into account, your work will yield better results in the long run. I will illustrate this argument using both a bathtub and a business.

You cannot fill a bathtub, using 100 per cent of the tub, without flooding the bathroom floor when you climb in. Realistically, water will likely only touch about 20 per cent of the surface area of the entire bathtub, give or take some percentage points, of course. Since approximately 80 per cent of your body is underwater as you bathe, you are getting 80 per cent of your use of the tub from that 20 per cent of the tub’s surface area that holds the water. The horrible mistake someone might make is to assume that since the bather is only using 20 per cent of the tub, he or she should only clean and maintain 20 per cent of that tub. You see how this can be disastrous! A bather cannot choose to ignore that other 80 per cent of a bathtub when he or she cleans. Although he or she might get away with such an approach in the short term, eventually the dirt of the unclean 80 per cent will be overbearing and the clean 20 per cent will not make for a good bath. This interpretation of the 80/20 Rule is not sustainable.

Here is another way to think about it: if you are filling the tub, and choose to ignore the drain hole because it does not help you hold the water, you will require considerably more water, effort and energy to fill the tub – and, the lasting effects of filling the tub are considerably smaller. As soon as the tub is filled, the water level will start to quickly fall because of the open hole. In this case, the drain hole is considered part of the 80 per cent that controls the 20 per cent.

In business school, we are taught that 20 per cent of our clients produce 80 per cent of our sales. The mistake that some business people make is to spend all of their time with that 20 per cent and completely ignore the rest. As with the bathtub, ignoring that 80 per cent can become messy in the long run. If you ignore those 80 per cent, you will create squeaky wheels in your business’s machinery. The 80 per cent will demand more time, complain a lot and become harder to please than otherwise. Ignoring your 80 per cent in favour of your business’ 20 per cent does not make the 80 per cent go away. In fact, that approach has the opposite effect. Ignoring complaints causes the dissatisfied group to get more vocal, agitated and attracted to your competitors. The end result of ignoring the 80 per cent in favour of the 20 per cent is time wasted operating in a damage-control mode to oil those squeaky wheels that will slow down your enterprise and cost you money. As with the bathtub example, this tunnel-vision problem with the 80/20 Rule will affect you in the long run.

GIVING YOUR FULL 100 PER CENT
So what is the solution to these two problems?  You want to spend most of your time with the theoretical 20 per cent who are yielding
80 per cent of your profits. But, you also need to spend some time with that 80 per cent group to make sure that they do not cause more serious issues over time and to ensure that they remain loyal and satisfied customers. All this needs to happen while you bear in mind that the figures 80 and 20 are only approximations.

You want to efficiently satisfy your 80 per cent so they no longer draw resources. Spend the least amount of time, energy, attention and thought with your 80 per cent so they no longer pull you away from your focus: your 20 per cent. In other words, spend 80 per cent of your time with the 20 per cent responsible for 80 per cent of your revenue and 20 per cent of your time with the 80 per cent responsible for only 20 per cent of your revenue. In short, your objective is to spend most of your time catering to the preferred 20 per cent of your customers without overlooking the rest. Remember, you never know when one of your less-active customers might decide to increase their involvement with you. Satisfying that less profitable 80 per cent holds the potential to generate value in the long-term. A satisfied customer can always move from your 80 per cent group to your 20 per cent group. Unfortunately, the alternative is also a possibility.

MAINTAINING THE MASSES
There are several creative ways to manage your 80 per cent. One way to neutralize 80 per cent of your clientele is to pass them off to another service provider, or you might want to hire an assistant who can manage the 80 per cent, provide quality service and maintain the loyalty of that group. Also, you might create products or services focused specifically on the needs of your 20 per cent and then use those products as pre-packaged models that you can offer to your 80 per cent. You might also use products focused on your 20 per cent as templates to create less-specific products that can be quickly re-created for clients in your 80 per cent group. The point of these tactics is to keep your 80 per cent satisfied while using approximately 20 per cent of your resources. This frees up 80 per cent of your resources to dedicate to your cherished 20 per cent. While the examples provided here are general, they illustrate the potential for creativity when managing your clients with the 80/20 Rule.

Once you have managed your less-efficient client group, you want to spend the bulk of your time, energy, attention and thought maintaining the 20 per cent of your client base that is powering 80 per cent of your business’s machinery. Essentially, this allows you to plug the tub drain so you can actually enjoy your bath.

Sunjay Nath, MBA, BScE, CSP, travels the world sharing “The 10-80-10 Principle,” which is a framework that helps individuals and teams improve their performance. The methodology combines best practices with small wins to help people empower themselves.
• www.SunjayNath.com.

This entry was posted on Thursday, December 17th, 2009 at 2:49 pm and is filed under Winter 2009. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.