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Busting the 80/20 Rule

vilfredo paretoAh, the 80/20 rule, also known as the Pareto Principle. This is a truly seductive statistic. It has not only the power of numbers but also a lyrical name.

The idea of the 80/20 rule is that 80% of something good – like revenue – comes from just 20% of something else – like customers. Or for another example: Only 20% of your work is actually productive, as in producing 80% of whatever.

Now, Pareto was a real person who really did throw the 80/20 figure around, but things go downhill from there. Let us begin the myth-busting with clarifying who Pareto really was and where those figures came from.

Vilfredo Pareto – Economist?

Pareto is often described as an economist but he lived during a time when such titles or degrees did not exist. It’s more accurate to say he completed a robust education in mathematics and had a strong interest in social issues of the time. He used those skills and interests in various ways, including by publishing papers. Because of his political leanings, we’d probably call him a blogger or a pundit these days.

The 80/20 Part

One of the things Pareto did was a calculation that showed 80% of the property was owned by just 20% of the property owners. (The area in question was part of Italy.)

An Idea Spreads

Property ownership equaled wealth and power. The idea of wealth and power being concentrated in just a few hands was a hot topic. This was the time of Socialism, and the Russian Revolution was right around the corner. So after Pareto published his paper about this calculation, he began to get paid gigs and more attention. His employers were often socialist-leaning individuals and organizations; however, Pareto also got fired a lot for being too much of an activist.

Eventually, Pareto quit working for money and lived off his inheritance and his Russian wife’s family money. This is just one irony in the story of 80/20.

How a Socialist Became a Business Icon

Pareto, avid Socialist, would not be at all happy to see his math and research being used for capitalistic purposes. So how did that happen?

Well, the period was not just a big one for publishing papers, it was also big for spreading ideas across the world; especially ideas wrapped up in complex statistics and equations. Lots of experts were analyzing and calculating like mad and big business ate it up. (Do you remember the original book and movie, “Cheaper by the Dozen,” about an efficiency expert’s wacky family? Real expert and his real family. Same time period.)

As Pareto’s papers got wider publication, the figures got re-applied to suit others’ desires and interests. Pareto tried hard to keep the 80/20 gig rolling, too. At one point, he “re-proved” his theory by calculating that 80% of the peas in his garden came from just 20% of the plants.

Fast forward a bunch of years to the 1940’s. Joseph Juran, a management consultant, named one of his management principles after Pareto. In other words, yet another person re-purposed these figures. Juran also strengthened their branding by giving them a fancy name: the “Pareto Principle.”

80% of Business is Generated by 20% of Prospects or Customers?

Juran was a quality control guy. Juran’s “Pareto Principle” was that roughly 80% of a problem with quality is generated by just 20% of the causes. So how did a quality-management theory get turned inside out to become one of marketing and sales most-beloved statistics?

If you consider that question for about three seconds, you know it was not because a bunch of salespeople hunkered down to do the math. Nor did they provide their managers with accurate data and then their managers did the math. Nor did sales work closely with the marketing departments and then those guys did the math.

The image of sales reps avidly tracking activities and doing math should have busted a hole in the 80/20 sales ‘rule’ long ago, and not just as it’s applied to sales. Instead, history repeats itself. Very few actually did the math over one hundred years ago and few do it now. People like the idea, love to attach an actual figure to it…and there you go.

To be fair, Juran did indeed calculate the 80/20 quality issue (just as Pareto had for property ownership and peas). Juran was also practical and did not suggest it was a hard and fast rule. He made a very good living persuading companies they should do the math, as well as apply the principle that little things often make a big difference. But the same balance cannot be attributed to the many who borrowed Juran’s impressive statistics with the romantic title. The phrase “Pareto Principle” and the “80/20 rule” became firmly woven into our business lexicon and the figures have been used and abused ever since.

What Next for 80/20?

Given all the above, is there any reason to use the 80/20 principle in selling? The short answer is “no,” but here’s the longer answer:

  • It’s certainly not a valid or reliable rule. If you can’t do the actual math for your actual prospects and customers, an 80/20 ratio is not a safe bet.
  • Besides, if 80% of your business really comes from 20% of your customers that’s not a good thing. What happens if you lose those customers?
  • As for broader business issues: Can you really calculate whether 20% of your effort produces 80% of the results? Doesn’t that depend on what comes easy or takes less time and what does not?

Even as a construct – an idea – it’s unlikely to be helpful. Let’s take the idea of productive work, for example. If you identify that most-productive 20% and then adjust your effort to focus on those things 100% of the time, then that work can’t account for just 20% any more. If the 80/20 rule really applies, then only 20% of what you’re now doing is the most productive and you should therefore adjust again. And then again. And again.

Or maybe the 80/20 rule really is a rule and if you adjust what you do to make that formerly-20% be closer to 42% a mysterious vortex opens and our entire world is motated in a nanosecond to a new dimension…maybe this has already happened.

Ah, well. These questions are probably best considered over a relaxing glass of something in the company of like-minded business philosophers who also enjoy math. Throw in some politics and Pareto’s ghost may smile upon you.

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