The eighty-twenty principle is also known as the Pareto law, principle of factor sparsity and the law of the vital few. The principle states that for many events, approximately 80 percent the effects arise from 20 percent of the causes.
The principle was suggested by management consultant, Joseph M. Juran and named after Vilfredo Pareto the Italian economist who observed in 1906 that eighty percent of land in Italy was owned by only twenty percent of the population. He developed the principle by making the observation that 20 percent of pea pods in his garden contained 80 percent of peas.
The eighty-twenty principle is a rule of the thumb in business for instance, 80 percent of sales from 20 percent of clients. Mathematically, the principle is followed by the power law of distribution which is also known as Pareto distribution for particular set of parameters and several natural phenomena has shown empirically to exhibit the state distribution.
The eighty-twenty principle means in anything that is few (20 percent) are many and vital (80%) trivial. In the case of Pareto, this meant that only twenty percent owned eighty percent of the wealth. The initial observation of the principle was connected to wealth and population. After noting that 80% of land in Italy was owned by 20% of the population, he carried surveys on different countries and to his surprise, found out that similar distribution was applied.
In the 1992 UN Development Program Report a chart that highlighted the inequality in a comprehensible and visible form was provided in what came to be known as the ‘champagne glass’ effect. The chart showed global income distribution was uneven with the richest being 20% of the population in the world. This percentage controlled 82.7% of the income in the world.
In business, the eighty-twenty rule is also used in different relevant aspects that are relevant to the business managers and entrepreneurs. These include the following:
- 80% of company profits are received from 20% of the customers
- 80% of the company complaints come from 20% of customers
- 80% of company sales come from 20% of products
- 80% of the sales made in a company come from 20%of sales staff
- 80% of profits made in a company come from 20% of time spend by its staff
Eighty-twenty principle therefore should act as a daily reminder that 80% of an individual’s or business energy and time on the 20% of the work that is important.
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