Another reason we don’t apply the 80-20 rule

I’ve written about the 80-20 rule several times because it keeps coming up. I’d like to believe that each time I revisit it I understand it a little better.

In its simplest form the 80-20 rule says 80% of your outputs come from 20% of your inputs. You might find that 80% of your revenue comes from 20% of your customers, or 80% of your headaches come from 20% of your employees, or 80% of your sales come from 20% of your sales reps. The exact numbers 80 and 20 are not important, though they work surprisingly well as a rule of thumb.

The more general principle is that a large portion of your results come from a small portion of your inputs. Maybe it’s not 80-20 but something like 90-5, meaning 90% of your results coming from 5% of your inputs. Or 90-13, or 95-10, or 80-25, etc. Whatever the proportion, it’s usually the case that some inputs are far more important than others. The alternative, assuming that everything is equally important, is usually absurd.

The 80-20 rule sounds too good to be true. If 20% of inputs are so much more important than the others, why don’t we just concentrate on those? In an earlier post, I gave four reasons. These were:

  1. We don’t look for 80/20 payoffs. We don’t see 80/20 rules because we don’t think to look for them.
  2. We’re not clear about criteria for success. You can’t concentrate your efforts on the 20% with the biggest returns until you’re clear on how you measure returns.
  3. We enjoy less productive activities more than more productive ones. We concentrate on what’s fun rather than what’s effective.

I’d like to add another reason to this list, and that is that we may find it hard to believe just how unevenly distributed the returns on our efforts are. We may have an idea of how things are ordered in importance, but we don’t appreciate just how much more important the most important things are. We mentally compress the range of returns on our efforts.

Making a list of options suggests the items on the list are roughly equally effective, say within an order of magnitude of each other. But it may be that the best option would be 100 times as effective as the next best option. (I’ve often seen that, for example, in optimizing software. Several ideas would reduce runtime by a few percent, while one option could reduce it by a couple orders of magnitude.) If the best option also takes the most effort, it may not seem worthwhile because we underestimate just how much we get in return for that effort.

5 thoughts on “Another reason we don’t apply the 80-20 rule

  1. There are very good reasons to focus on the other 80% of your inputs even if only 20% of inputs results in 80% of output. The inputs in the 20% today may not be in the 20% tomorrow. Concentrating on today’s 20% seems to be a sure fire way to remain non-innovative and stagnate into oblivion.

    For example, say you own a restaurant. Anyone who has run a restaurant understands that repeat business is the backbone of your profits. However, people move or their tastes change over time. The set of your repeat customers today will not be your set of repeat customers tomorrow. Thus you cultivate other customers, to grow or at least maintain the size of your set of repeat customers, even when you know most customers will not be repeats.

  2. “If 20% of inputs are so much more important than the others, why don’t we just concentrate on those?”

    Here’s another answer: there are often constraints on the most fruitful 20% of inputs, plus you profit to the point of your marginal benefit equaling your marginal cost. In the customers example, there’s only so much your top 20% customers are willing to buy. But just because your top customers buy so much more, doesn’t mean that it’s unprofitable to sell to lesser customers. So you are better off selling to anyone, as long as the cost doesn’t exceed the benefit of doing so. Identifying the top 20% of customers just helps you allocate your efforts appropriately.

  3. Yet another reason: your inputs may not be uncorrelated.

    Example: For bus or train companies, most of their profits come from a limited number of departures each day. Trunk lines, and at rush hour. But many of those people cramming into the same carriages on the same lines each morning rely on sparsely used late-night departures to get home again, or change to secondary lines, or rely on rural routes for occasional trips.

    20% of departures create most profits, but without the other 80%, the 20% would no longer be heavily used either, and the company would sit with no profitable departures at all. It may indeed pay for a company to run routes that lose money by themselves, because the time and space coverage increase traffic enough on other lines to make up for it.

    Same thing with universities, in a way: only a subset of departments may be financially profitable, but the presence of the other ones is what makes it a university, not a trade school, so they’re actually necessary even from a financial standpoint.

  4. I heard one explanation from Microsoft Office: They found that 80% of people used 20% of the features (or something like that, might have been 90/10). So everyone asked, why put in all those features? Why not just the ones people use. Well, turns out, each person only use 20% of the features, but it isn’t a consistent 20%; just about every feature is heavily used by some segment of the customer base.

  5. Anonymous Coward

    Put simple, in terms of software: your product/service is usually preferred because of 20% of the features it has – the ones which the competition doesn’t have. But without the remaining 80%, you’d have no viable product.

Leave a Reply

Your email address will not be published. Required fields are marked *