Budgeting:

Implementing the 80/20 rule to your monthly income, you would have to calculate 20% of your net income and automatically allocate that amount to your savings account or debt repayment first. The remaining 80%, distribute it towards your necessary expenses and discretionary spending throughout the month; essentially, “paying yourself first” by prioritizing savings before other expenditures.

Key steps:

• Calculate your net income: Determine your total income after taxes are deducted. 
• Set aside 20%: Calculate 20% of your net income. 
• Prioritize savings: Immediately allocate this 20% to your savings account, retirement fund, or debt repayment. 
• Manage the remaining 80%: Divide the remaining 80% of your income into categories like paying yourself first, housing, food, transportation, and discretionary spending.

Project Management:

The 80-20 rule is a principle that states 80% of all outcomes are derived from 20% of causes. It’s used to determine the factors (typically, in a business situation) that are most responsible for success and then focus on them to improve results.

What is the 80/20 rule in Agile?

One of the core principles of Agile development is the Pareto Principle. It basically says 80% of the impact can be generated by focusing on 20% of the problems. Rapidly iterate on the set of problems by focusing on solving only the 20% that provide 80% impact each iteration quickly, faster and faster every time.

How the Pareto Principle Can Help You

There are many ways in which you can put the Pareto principle to good use. Here’s a couple of ideas:

Planning Your Day

Since 20% of your effort amounts to 80% of the effect of your work, you should consider which activities comprise the vital few you need to focus on. To maximize your efficiency, you must identify them and work on them first. Mind you, though, you should not neglect the other tasks. Move on to doing them once you clear the big ones.

Delegating

As an executive or manager, you may feel that time isn’t exactly on your side—this is when delegating comes in handy. However, it may be a bit of a problem to decide which things you should do yourself and which ones could be handed over to your team. Not if you know the 80/20 rule. Focus on the vital 20% and delegate the rest.

Risk Assessment

How to monitor risks? Once you realize that 20% of risks can cause 80% of setbacks, you’ll know that to minimize any possible damage you must identify and closely monitor the 20%. The rest needs to be monitored too, but the relative damage it can cause is much less serious.

Sales and Marketing

If 80% of your income comes from 20% of your customers, optimize your products, services, and advertising for the 20%. Even if not everyone ends up happy about your choices, the bottom line will be in your favor.

Knowing that 20% of your posts generate 80% of your traffic, identify which types of posts perform best. Then, design a content marketing strategy that incorporates more similar posts.

“Focusing on a narrow set of the most impactful changes that can be made in your personal of professional life can bring about great improvement but also highlight the concentrated risk that exists with any changes in these decisions. In other words, changing 20% of your life or work represents a high risk/high reward scenario. If handled well, it can lead to disproportionate improvements, while handled poorly, it can result in outsized detrimental impact.

In my business environment, I attempt to isolate central touchpoints for all other areas of my work responsibilities. From there, I seek ways to automate or improve those processes in the hopes of benefits cascading throughout my work. However, because of the centrality of these activities, I need to be extremely careful when implementing changes as they can lead to widespread problems.”

80/20 Rule in Marketing and Business

One of the most common contexts for the 80/20 rule is in the marketing and sales activities of companies. While it’s often repeated that 80% of any company’s profit is generated by 20% of its customers, the same proportions could extend to other areas of business activity, for example:

• 80% of complaints come from 20% of customers.
• 80% of profits come from 20% of the company’s effort.
• 80% of sales come from 20% of products or services.
• 80% of sales are made by 20% of sellers.
• 80% of clients come from 20% of marketing activities.

What does this mean in practice?

To maximize their efficiency businesses should focus on the vital 20% of activity.

So—in this case, the Pareto principle becomes the Pareto methodology. And the first step to implementing it is to identify which activities comprise the vital 20%.

How to use the 80/20 rule to manage time effectively?

When applied to work, it means that approximately 20 percent of your efforts produce 80 percent of the results. Learning to recognize and then focus on that 20 percent is the key to making the most effective use of your time.

Explaining the 80-20 Rule with the Pareto Distribution

While not as well-known as the bell-shaped Normal (Gaussian) distribution, the Pareto distribution is a powerful tool for modeling a variety of real-life phenomena. It is named after the Italian economist Vilfredo Pareto (1848-1923), who developed the distribution in the 1890s as a way to describe the allocation of wealth in society. He famously observed that 80% of society’s wealth was controlled by 20% of its population, a concept now known as the “Pareto Principle” or the “80-20 Rule”.

The Pareto distribution is a power-law probability distribution, and has only two parameters to describe the distribution: α (“alpha”) and Xm. The α value is the shape parameter of the distribution, which determines how distribution is sloped (see Figure 1). The Xm parameter is the scale parameter, which represents the minimum possible value for the distribution and helps to determine the distribution’s spread. The probability density function is given by the following formula:

When we plot this function across a range of x values, we see that the distribution slopes downward as x increases. This means that the majority of the distribution’s density is concentrated near Xm on the left-hand side, with only a small proportion of the density as we move to the right. For reference, the “80-20 Rule” is represented by a distribution with alpha equal to approximately 1.16.

Figure 1: Pareto Distribution (various alpha)

Pareto in the Real World

The Pareto distribution has major implications in our society. Consider its original use case, describing the distribution of wealth across individuals in a society. The vast majority of the world’s citizens are clustered at a low level of wealth, while a small percentage of the population controls the vast majority of all wealth. Policymakers may not realize that wealth is distributed according to a Pareto distribution rather than a normal distribution, and this gap in understanding could lead to suboptimal policy decisions in countries around the world. 

Perhaps equally profound is the ability to model productivity according to a Pareto distribution (while productivity and wealth are both distributed in the same manner, their correlation at the level of individuals is a matter of dispute and varies by context). In most professions it is hard to precisely quantify a worker’s productivity, but Major League Baseball (MLB) teams are experts in exactly this exercise. Using the Wins Above Replacement (WAR) metric as an estimate of a player’s value, we can see that MLB players are able to produce wins for their team in a Pareto-distributed fashion. It is amazing that even among the best 1,500 baseball players in the world, they are still distributed in this extreme way.

Figure 2: Distribution of WAR, 2021 MLB Players

There is anecdotal evidence of the Pareto Principle in other professions, for example it is commonly noted that it seems like a small number of software engineers are responsible for the majority of important code written at a firm. There are other cases of Pareto-distributed instances: the size of cities, value of oil wells, popularity of songs and videogames, size of insurance claims, and much more. By better understanding the underlying distribution of the phenomena around us, we can build better models and make more intelligent decisions. The Pareto distribution is just one option for building this understanding, and it is a powerful tool.