In the late 19th and early 20th Centuries, an Italian economist and sociologist, Vilfredo Pareto, noted that 80% of Italy’s money was held by 20% of its population. More study concluded that other countries had the same imbalance in wealth distribution. The Pareto Principle became widely used to explain and motivate in other areas, such as sales, marketing, personal development, and human resources. When you look at the 80/20 rule mathematically, the distribution can change. What do today’s mathematics say about the Pareto Principle? Is the 80/20 rule still accurate or has a shift occurred?
In general terms, we can say that 80% of effects come from 20% of causes. In marketing, Pareto is used to say that you have to expend 80% effort, including manpower and money, to gain 20% in sales. From the sales angle, we can say that 20% of our customers carry the majority of our worth. In Human Resources, the Pareto Principle is assigned to dreamers versus achievers – where the 20% are the ones who actually get the work done. With that understanding, let’s look at what numbers tell us about our work in the 21st Century.
In online communities, the Pareto Principle doesn’t come close to being accurate. Web 2.0 wisdom says that 90% of online community members are lurkers, the people who watch and never say anything. 9% of the community contributes a very small amount of the discussion, while 1% are usually the ones carrying the entire community. This shifts the mathematics to 99/1! Consider sports purses and salaries: in a golf tournament, the first place purse can be double that of the second place finisher. If you had 100 golfers, it’s reasonable to say that the top 5 finishers would receive up to 95% of the total prize money. In the big four sports leagues in the U.S. (NBA, NFL, NHL, MLB), the smallest salaries for a backup bench player are around $300,000 – but the biggest stars can command annual salaries of up to $20 million! In business, the average household income is around $48,000 annually, while the average CEO racks up about $10 million during the same time period. What about taxes? The GAO can show you that the top 10% of income earners pay nearly 90% of federal taxes.
So if we look at the Pareto Principle today, has 80/20 shifted to 90/10 or even 95/5? In any situation, we can expend 80% effort to obtain 20% reward, but is the effort enough in relation to the reward? If the shift has occurred, we need to be looking for value in the top 10 or top 5 percentiles for whatever reward we’re seeking. Think about your organization and what it spends its time doing. If you’re ready to take it to the next level, to really succeed, think about today’s numbers. Your new goal is not 20% but more like 5 or 10%. You must examine every action you take and adjust it to the smaller success margin. The same principle applies to the choices you make – a choice based on the new success margin must be more well planned and executed than ever before. You’ll still gain success, but it will only come with higher standards and more targeted actions.