Understanding and Applying the Pareto Principle

4 min read • May 03, 2021 • Grant Olsen

Even if you’re not a hockey fan, you’ve likely heard a certain quote from one of the sport’s greatest players. Wayne Gretzky told Canadian commentator Bob McKenzie in a 1983 interview, “You miss 100% of the shots you don’t take.”

Sound familiar? The legendary quote has been used in motivational speeches around the globe and even drew praise from Michael Scott on The Office. While the idea that 0 shots will yield 0 successes isn’t particularly surprising, the sentiment still stirs something in our souls. We’re gonna take those shots, dammit!

The 0/0 Rule Meets the 80/20 Rule

As a small business owner, you have already begun taking shots. The life of an entrepreneur requires action and bravery. But are all your shots scoring the same results? Nope. According to the Pareto Principle, 80% of your impact comes from just 20% of your efforts.

This mathematical formula is attributed to an Italian economist by the name of Vilfredo Pareto. He analyzed wealth distribution and determined that just 20% of Italy’s citizens held 80% of the country’s riches. An alternative version of the origin story is that Pareto noticed that 20% of the plants in his garden were producing 80% of the fruit.

Nowadays, the 80/20 rule is applied to everything from business production to familial happiness. When you understand that not all of your shots bring the same impact, you are freed from the quantity side of things and can focus on the quality. In this way, Pareto’s Principle is all about maximizing your efforts.

The 80/20 rule has relevance for every human on earth, but small business owners are a special case. You have more responsibilities on your shoulders than you could ever handle in a day. Something has to give. So it might as well be some of the less-effective things from the 80%.

“There are several ways that the 80/20 rule can be used to enhance your own productivity or that of your business,” explains business management guru F. John Reh. “First, if you look closely at the items on your ‘To Do’ list, chances are only a few are tied to important issues. While it may be satisfying to cross off a large number of the smaller issues, the 80/20 rule suggests you focus on the few more important items that will generate the most significant results […] Next, in assessing risks for an upcoming project, you’ll find that not every risk carries equal significance. Select the risks that pose the highest potential for damage and focus your monitoring and risk planning activities on them. Don’t ignore the others, just distribute your efforts proportionately.”

As Reh advises, the Pareto Principle isn’t about abandoning responsibility. It’s about targeting your efforts. You will always have uninspiring and low-impact duties that are essential to your business. Handle them with care, but don’t devote any unnecessary seconds to them.

How Accurate Is the 80/20 Rule in Your Life?

As with any general rule, there are exceptions to Pareto’s Principle. But you’ll find that even when the ratio isn’t exact, it’s still beneficial to put your efforts into the vital few. For example, if only 20% of the outfits in your closet are being worn 80% of the time, it’s probably time to clear out some of the clutter.

The stakes become higher in the business world. The more time you allocate to less-crucial tasks, the less you have for your vital few. So you must treat your time and energy with the respect they deserve.

“Focus on the 20% of your customers that make up the bulk of your revenues and invest your time in understanding, identifying, and qualifying similar customers,” says a business report from The Balance Small Business. “Regularly evaluate the ​80% of your customers that generate 20% of your business and identify opportunities to shed them for customers that drive better results. Some managers and firms actively cull their customer listings every few years, effectively firing the bottom performing customers.”

This same efficiency can be used to maximize your production, advertising, customer service, and inventory. Wherever you apply the 80/20 rule, look for ways to not only dispel waste but to also upgrade some of the 80% into the ranks of the vital few.

Let’s say that you launched 10 new products last year. Your analysis reveals that 2 of the products are bringing in 80% of the revenue. Rather than ditch the remaining 8, you should assess their individual strengths. If 2 of these products are legitimate flops, you might need to remove them from your lines. But there could also be 2-3 other products that also have the potential to become top performers if you apply some of the lessons from your vital few. In this way, your 20% can help strengthen a select portion of the 80%.

When used correctly, the 80/20 Rule streamlines your life and empowers your business. You’ll never make 100% of your shots, but when you put emphasis on the best shots, you’ll always enjoy a better score.

Grant Olsen

Grant Olsen

Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.