Most leaders know their best customers. Few realize how much of their business depends on them.
Twenty percent of your customers generate 80% of your revenue. Twenty percent of your products account for 80% of your sales. Twenty percent of your employees create 80% of the output. This pattern repeats so reliably that it has a name: the Pareto Principle. Understanding this principle is straightforward. Using it strategically requires knowing where to look and what to do with what you find.
The Pareto Principle, or Pareto Rule, or 80/20 Rule, asserts that in any situation, approximately 80% of the results are generated by 20% of the activities. In other words, 80% of effects are generated by 20% of causes.
The Pareto Principle is named after Vilfredo Pareto, an Italian sociologist and economist who, through his study of income distribution and the relationship between wealth and population, observed that 20% of the population held 80% of the wealth.
Dr. Joseph Juran, a Romanian-born American management consultant and engineer who later came across Pareto’s work, noted that the Pareto Principle was actually a universal phenomenon and began applying it to business, including in quality management.
Dr. Juran also referred to it as “vital few and useful many” to emphasize both how critical the 20% were, but also to remind all that the remaining 80% of the causes should not be ignored.
The question for leaders is not whether the 80/20 pattern exists in their business. It almost certainly does. The question is where to look for it and how to act on what it reveals.
Business application
Today, the Pareto Principle is widely applied in business across multiple areas, including process management, manufacturing, human resources, project management, time management, wealth distribution, and spending habits analysis.
Although broadly validated, the Pareto Principle does not apply to every scenario and does not always conform to its precise 80/20 ratio. However, even where the exact percentages vary, the Principle’s assertion of an uneven relationship between causes and consequences, between input and output, still guides businesses in their responses to the information.
Knowing that 80% of the output in any given process is attributable to 20% of the input, managers are compelled to focus on that high-impact group of activities when setting priorities.
Where to look for the pattern
The pattern often reveals where results are concentrated. For example, when:
- 20% of customers are responsible for 80% of sales, or
- 20% of a product line accounts for 80% of sales, or
- 20% of employees deliver 80% of overall productivity or client acquisition.
The rule can also be used to identify and troubleshoot challenges. For example, where:
- 20% of employees are responsible for 80% of absences, or
- 20% of services are responsible for 80% of complaints, or
- 20% of processes are responsible for 80% of production waste, or
- 80% of defects originate from 20% of the supply chain.
What to do with what you find
In these cases, customer focus, product focus, and sales focus are adjusted based on the observations. For example, inventory management, incentives, or even cash flow allocation could be increased for the better-performing products.
Or, if 20% of customers are responsible for 80% of sales, designing a separate program to reward these customers and encourage their loyalty might be appropriate.
Or, by studying the characteristics of those top customers, companies could more easily identify the ideal profile of future successful clients and how to find them.
In troubleshooting cases, the Pareto Principle provides management with a clear focus on identifying and addressing areas for improvement. For example, it helps managers compare contributing factors to a quality problem and assess the impact of each. Or, they can use the statistical data to inform their prioritization of open tasks or improve their decision-making.
The 80/20 Rule reveals patterns. It doesn’t explain them. Building upon our earlier example, your highest-revenue customers might also generate the most complaints, or they might be your quietest. But the Principle will prompt you to look.
While the exact percentages will vary, for instance, where 30% of causes might account for 65% of consequences rather than 80/20, companies still benefit from using the insight to drive improvement or move those ratios toward their desired targets.
A finance company found that 20% of clients generated 80% of revenue. They developed a program that provided this segment with faster processing, direct access to decision-makers, and priority service. The focused approach increased sales from these clients by nearly 30%, created switching costs that raised barriers to entry for the competition, and strengthened loyalty.
Companies that apply the 80/20 lens systematically across their operations identify which customer segments, products, and processes generate disproportionate value or recurring challenges. That clarity drives better resource allocation, faster problem-solving, and stronger growth.
The Pareto Principle does not make decisions for you. It reveals where they matter most.