The Pareto Principle is also called The 80/20 rule or The Law of Vital Few and even the Principle of Factor Sparsity.
The 80/20 rule shows that 80% of results come from 20% of the causes.
The principle was named after an Italian Economist called Vilfredo Pareto who discovered that 80% of the land was owned by 20% of the population.
The Pareto Principle has become a widely used principle in all spheres of life. I consider it the greatest law of productivity.
Application of the Pareto Principle
The 80/20 rules can be applied in all faculties of life. It can be used in business, finance, personal lives, technology, manufacturing, etc.
We are only going to consider a few of its applications that are most relevant to us.
1. To boost productivity
The 80/20 rule can help us achieve our maximum potential with the least effort. This is what we call efficiency. As the law implies, 80% of the output will come from 20% of the input.
Many people fail because they try to do so many activities at a time. They will have 20 activities to do in a day. All these activities will add very little value to their results.
Even if you cannot exactly calculate what accounts for 20% of your activities, you can get a few important activities in a day and commit to them.
Successful people only try to do a few things at a time. Billionaire Jeff Bezos advises people to have one goal per day. This is why he is the richest person in the world with a net worth of around 200 billion dollars.
Set one goal that you intend to accomplish per day and work on it until you accomplish it. Do not leave it hanging. As the famous quote says, “successful people do not sleep when they are tired but when they are done.”
If you cannot have a goal every day, choose 3 of your most crucial activities and commit to doing them for the day.
2 ways to know the most crucial activities:
- Importance– What do they contribute to their welfare? Financial or otherwise. This determines what should be done and what should not. It is related to effectiveness.
- Urgency- When are the results needed. The urgent the activity, the more crucial it is to you that day. It determines what should be done at what time. It is related to efficiency.
Based on the two aspects, you can have 4 combinations:
- Important and urgent. This one should be given the priority. It should be done first.
- Important but not urgent. This one should be given the 2nd priority. It should be done second.
- Not important but urgent. This includes social aspects of life like taking your friend for shopping. This one should be done during leisure time. After you are done working.
- Not important and not urgent. These activities should never be done. They just waste your precious time. Only do them for fun.
If you can concentrate on the important activities and give priority based on the urgency of activities, your productivity will surge. When you become productive, you achieve more with less time.
Therefore, identify 3 activities that are most important to you. Organize them based on their urgency and do the most urgent first. However, give more time to the most important one.
2. Pareto Principle in Business
The 80-20 rule can also be applied in business in the following ways:
- 20% of customers bring 80% of revenue
- 20% of business activities will bring 80% of the business.
- 80% of growth will come from 20% of the growth strategies and tactics.
The concept is the same. A few important things will bring most of the results. The prudence comes in concentrating on those important activities and giving them most of the time and effort.
3. The 80-20 Rule in wealth
The 80-20 rules can show us how wealth is distributed amongst different classes of people. It is proven that 20% of the richest people own more than 80% of the global resources. It also follows that 80% of the poorest people own only less than 20% of the global wealth.
This is what we call wealth inequality. It is the effect of capitalism in our society today. In as much as wealth inequality is not a good thing in society, it is something that we cannot change.
The global economy is built on the pillars of capitalism and we would have to bring the whole global system down to fix wealth inequality. This is not possible under the sun.
Since we cannot change the system, it is the responsibility of each one of us to be among the 20% that own 80% of the wealth. After all, capitalism is about everyone minding his own business and trying to get as much as possible through trade.
We can also point out that at this point in time, almost all poor people are self-made. They decide to become poor. In as much as we might try to sympathize we them and point and blame the system, the following facts will not allow us to do so.
- 67.4% of ultra-wealthy people are self-made. This means that they never became wealthy because of their background.
- 16% of billionaires did not proceed after high school education. Another 1 out of 8 billionaires is college dropouts. Therefore, the level of education is not an excuse.
- 12% of billionaires are women. 17% of them are self-made. This means that gender is not an excuse.
These statistics disqualify all your excuses.
All successful people have the following qualities:
- They are all business people.
- They continue learning.
- All take risks.
- They are trained to see opportunities.
- They have a prosperity mindset.
The easiest way to become successful is to do what successful people do. If you successfully follow the lifestyle of successful people, you will become successful. By doing what billionaires do, you will become a billionaire.
The only way to succeed is by trade. Just start a trading activity instead of just working for someone else. Even if you have to work for someone else, have other people work for you.
The world’s economy was made to favor producers and not consumers. Make sure you produce something. Do not just work for someone, get paid, and consume all of it. If you do so, you will never get to the top 20% who own more than 80% of the wealth.
The more we keep complaining about wealth inequality, the more we lose. Let us work towards becoming wealthy too. Excuses and complaints have never made anyone rich.
Final thoughts on the Pareto Principle
If you can apply the Pareto Principle in your life and business, you will be ahead of 99% of people who don’t. Many people rarely have a plan for their life and day.
They just wake up and do what they have always done without even measuring the contribution of those routines in their lives. This is called drifting through life. Life drifters never succeed. You have to live your life intentionally to get great results.
Following the 80-20 rule will not only bring success but will bring it at minimal effort. Is this not what we all want?
Founder/ C.E.O- Wealthy Wolves Consulting & Giimark Ltd/ Best-selling Author/ Speaker.