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Understanding The 80/20 Rule (Pareto Principle) And Putting It Into Place In Your Startup

What if you could work less than a quarter of your workday and still earn the same amount of money? It all sounds great…and that’s an example of flashy marketing, but NOT exactly the 80/20 rule as we know it.

But since you asked, let’s talk about what 80/20 really means and how the Pareto Principle has been revolutionizing business for over 100 years.

Understanding The Pareto Principle

The Pareto Principle is based on the philosophy of Italian economist Vilfredo Pareto, as well as Joseph Juran, a management consultant who improved upon it. The essence of the principle is that 80% of outcomes come from about 20% of causes.

While Pareto used the concept to illustrate that 80% of Italian land was owned by only 20% of the Italian people, the concept evolved into something more scientifically observable. That the 80/20 principle is true in multiple cases, and possibly by natural phenomena.

How Is It Used In Startup Business?

Let’s say 20% of a company’s products account for 80% of total sales. Other trends might suggest that 20% of targeted customers account for 80% of a company’s profits.

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While some believe this could be the result of chance, or even an intentional strategy in income distribution (which you can read more about here), the phenomenon still rings true over multiple aspects of business, multiple industries, and even interpersonal relationships outside of the office.

You might say that the truth of the Pareto Principle is so universal it can be applied to multiple disciplines and scenarios.

How The Pareto Principle Applies To Start-Up Businesses

One thing’s for sure, it’s a “must” in start-up businesses because you always start with limited funding, limited time, and a host of other challenges. Wasting resources, and not planning ahead for maximum efficiency, could be detrimental to the business.

For example, one field in which the principle is frequently cited is Quality Control. “Pareto charts” help executive planners prioritize a wide variety of certain defects (as in 20% of the most essential) so that they can optimize improvement quickly.

The idea is that if you can maximize impact while putting in the least amount of work, it will help your team stay focused and work at maximum capacity. Pushing employees to work at 100% all the time, obviously, wears everyone out. If everyone could work smarter, and not just harder, it creates a more productive office.

Or, it could also refer to the principle of identifying an entity’s “best assets” and then using them effectively to take in a larger share of the market.

Even in academic or family relationships, the principle remains eerily demonstrable. If a student is expected to pass a test, he or she may discover that only 20% of a textbook is relevant to passing the exam, not all 100%. The student, therefore, tries to identify the most valuable portion of the textbook to study.

What Is The 80/20 Rule?

If you want to learn the true 80/20 rule as it relates to business, and your start-up business specifically, it’s time to read more about the fundamentals of economy and marketing.

Acuity Training posted an expert summary of the 80/20 rule, highlighting how the Pareto Principle can help entrepreneurs manage priorities and plan more efficiently. Why not take a look and jot down some notes for your own project?

Criticism Of The Pareto Principle

Criticism focuses on the misapplication of the Pareto Principle, rather than faulting the original source material. The idea that 20% of effort will always achieve 80% of the result is oversimplifying the issue.

The principle is that 20% of the causes will lead to 80% of the consequences. The challenge is not to get lazier, or work less, but to make sure the company is staying focused on the best potential for market impact.

Plan Everything – And Be Surprised!

Of course, even the most extensive planning doesn’t protect you from unknown factors. That’s just one of the pros and cons of being an entrepreneur in a competitive industry. But the truth of the Pareto Principle is that applying it can help you in certain cases.

It helps you to focus and spend your resources wisely. That can serve as a protective shield from whatever unknowns might affect your business in the coming years.

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