Finance

What Is the 80/20 Rule? A Simple Guide to a Life-Changing Principle

Be honest: at some point, you’ve found yourself scratching your head and thinking: what is the 80/20 rule that everyone keeps talking about?

No, it’s not a math question. And we’re not referring to the 80/20 celebrity diet that took Hollywood by storm in 2016. We’re talking about a life-changing principle that the world’s best and brightest entrepreneurs seem to understand intuitively.

The 80/20 rule, also known as the Pareto principle, is by far one of the most influential time-management and self-improvement mantras around. Believe us when we tell you that it pushes you to grow as an entrepreneur.

So what is the rule? How does the rule apply to business? And what does it have to do with someone growing peas in their garden?

Come with Foundr as we explore the 80/20 rule from the ground up. We will give you examples of how the 80/20 rule can improve your business (and life) using a fail-proof framework and a little elbow grease.

Who Created the 80/20 Rule?

Like any good origin story, the 80/20 rule has a rather humble beginning: pea pods and math.

Influential Italian economist Vilfredo Federico Damaso Pareto was born in Italy in 1848. Both an avid mathematician and gardener, legend has it that Pareto noticed that 20% of the pea plants in his garden were responsible for 80% of the peas produced.

This was Pareto’s lightbulb moment: if there was uneven distribution in his pea production, could there also be uneven wealth distribution in Italy?

Diving headlong into research and economic data, he found that 80% of production typically came from just 20% of companies. Applying this rule to macroeconomics, Pareto went on to publish his first book, Cours d’économie politique, showing that 80% of the wealth in Italy was owned by 20% of the population.

Not bad for someone with a green thumb and a love of numbers.

What Is the Rule?

In a nutshell, the 80/20 rule states that roughly 80% of consequences (outputs) come from 20% of the causes (inputs).

The 80/20 rule helps direct your time, money, and resources towards things that “yield the highest and best results with the most efficient effort possible…the more focused the inputs are, the better the outputs, in other words” says Steve Surdez of StoryCore.

According to Investopedia, the 80/20 rule should be used as “a guide for how to allocate resources efficiently… simply put, it can give you a window into who to reward or what to fix.”

Here are some real-life 80/20 rule examples as defined by Forbes:

  • 20% of customers account for 80% of total profits
  • 20% of manufacturers supply 80% of the market
  • 20% of sales reps generate 80% of total sales

In 2002, Microsoft famously applied the 80/20 principle and allocated resources to patch only the top 20% of bugs impacting their software.

“One really exciting thing we learned is how, among all these software bugs involved in the report, a relatively small proportion causes most of the errors,” former Microsoft CEO Steve Ballmer wrote in his three-page memo. “About 20% of the bugs cause 80% of all errors, and—this is stunning to me—1% of bugs caused half of all errors.”

You may not know it but you have been unconsciously using the 80/20 rule in your everyday life.

Peek into your wardrobe. Notice that you have 10 pairs of shoes but rarely stray from your sneakers and flip flops? Do you rarely deviate from your usual coffee order at a coffee shop? How many apps do you have on your phone, and how many do you actually use?

That’s the 80/20 rule in action.

Applying the Rule to Business

So, how does the 80/20 rule work with business and management?

Applying the 80/20 rule helps you focus on vital areas of your business where you should be spending the most time. For example, if we apply it to sales: 20% of customers are responsible for 80% of sales. Therefore, your efforts should be focused on the 20% of customers giving you the highest sales.

If you’re a freelancer, 20% of your clients are responsible for 80% of your profits. This means that you need to focus your time and efforts on strengthening your relationships with these clients.

This doesn’t mean that you should ignore or neglect your other clients. What the 80/20 rule means is that if you find yourself overwhelmed, you can prioritize and dedicate your efforts to the 20% and still make bank.

Ground-breaking, isn’t it? But wait, there’s more! Not only can the 80/20 rule be applied to business—it can also affect how you do business:

Power-Up with the 8/20 Rule

Level-Up Your Productivity

Let’s apply the 80/20 rule to something that most entrepreneurs struggle with above all else: productivity.

Choncé Maddox for Calendar.com says that the key to 80/20 productivity is to identify your critical 20% tasks and let the other 80% of tasks fall by the wayside.

Begin by creating a list of everything you do during the day, including time spent and any returns. “This provides the perfect opportunity to look at your calendar and be completely honest about what you’re doing with all your time,” she says.

For each task, ask yourself:

  • Should this task be labeled as high-priority or urgent?
  • Is it possible to outsource it?
  • Is this a high-return task? Does it bring me closer to my business’ core mission?

Let’s pretend you work in sales. Every week, you spend three hours preparing for upcoming sales pitches, and three hours sending invoices. Preparing a next-level sales pitch has the chance to bring you profit. It’s something you cannot outsource, and it’s highly time-sensitive.

Yes, sending an invoice is high-priority because invoices are how you get paid—but if you can outsource it, then you have suddenly opened up an extra three hours in your week to focus on your sales pitch. Therefore, your sales pitch is in your 20%.

As you work through analyzing your task list, you’ll get a feel for your 20%. Becoming a productivity machine is all about identifying what matters most and focusing on that first.

Don’t Be Afraid to Delegate

Kevin Kruse, CEO of LEADx and author, interviewed hundreds of self-made millionaires, Olympic athletes, and high-achievers to find out what makes them unique.

“For them, handling every task that gets thrown their way—or even every task that they would like to handle—is impossible,” he says. “They use Pareto to help them determine what is of vital importance. Then, they delegate the rest, or simply let it go.”

If you find you’re spending your time micromanaging every tiny aspect of your business, you’re not only being inefficient with your time, you’re also holding yourself back from growing your business further.

“Business owners tend to do everything, which isn’t practical as you grow,” says Forbes Council member and business coach Nick Leighton.

“You’re bogged down with processes and this leads to burnout and prevents your business from growing. Instead, do what you love, outsource the rest.”

Leighton has a method for successful outsourcing and delegating:

10/80/10 Success Factor For Outsourcing:

  • 10% of outsourcing is on you to plan the required work and set clear expectations and goals
  • 80% is on the person you’ve delegated the task to
  • The final 10% is on you to conduct a thorough review, suggest changes, and add the finishing touches

Do those numbers look familiar? Leighton’s method is a key example of the 80/20 rule in action.

Launch your side hustle training

Find Your 80/20, and Get 100% Out of Your Day

So, what does your 80/20 look like?

The 80/20 rule is useful for optimizing productivity and allows you to better manage yourself as an entrepreneur. Remember that the 80/20 rule is not designed to make you work less—it’s designed to help you work smarter. With only 24 hours in a day, you need to use your energy wisely.

Whether you’re ramping up efforts with your 20% customers, delegating tasks to devote more time to your highly profitable digital marketing, or just nurturing your flourishing pea plants, the truth remains the same: your vital 20% will get you closer to your goals.

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