ôô

# What Is the 80/20 Rule? The Pareto Principle Explained

By
Stever Robbins
Episode #512

In the wonderful world of working less and doing more, the ideal life is one where you have a magical genie’s lamp. You rub it, tell the genie what you want, and it happens. You’ve worked less. Far, far less. And done more. Far, far more.

This is the ideal life. And Bernice, owner of Green Growing Things Plant Stores I and II, dreams of someday having that lamp. She has so much to do, and it seems like everything is more work.

It seems so easy to work more and do less, but that way lies ruin. Bernice’s genie is right in front of her: it’s called the Pareto Principle, or more commonly, the 80/20 rule.

## Less Is More...Almost Always

It turns out that reality is lumpy. Not all things are created equal, not all actions have equal consequences. Let’s say you want a big, beautiful house. If you actually have a genie, you can rub the lamp and ask for it. BOOM! You’ve got 24 karat gold toilets. Good for you.

But what if you have the lamp, and instead of rubbing it, you put it on your shelf and spend your time day-trading cryptocurrencies? You make enough money on paper to buy those gold toilets, but the crypto-exchange you’re using gets hacked, and a 13-year-old Russian high schooler steals your entire net worth, leaving you broke.

You have two possible actions: 1) rubbing the lamp, and 2) trading cryptocurrencies. Rubbing the lamp will get you a house. Trading cryptocurrencies will get a 13-year-old high schooler a house. Clearly, not all actions are created equal.

## Reality Is Really Lumpy

What Pareto observed is that generally, only 20% of inputs control about 80% of outputs. 20% of the population controls 80% of the wealth. 20% of your actions produce 80% of your results. (The rest of your actions don’t have much effect one way or another.) And so on. Bernice can use this to her advantage.

## Revenue Is Lumpy

Bernice lists out all the product she sells, along with sales records for the last year. She figures out how much revenue each product accounts for.

The store sold \$1,000,000 worth of plants last year. Of that, \$550,000 came from sales of Audrey IIs, \$250,000 came from sales of Venus fly traps. The rest of her inventory—more ordinary plants like roses, lilies, orchids, and snozberry bushes—sold only \$150,000 combined.

It turns out that 80% of her revenue came from the sales of her two carnivorous plants: Audrey IIs and Venus Fly Traps. If she wants to increase her revenue, chances are that concentrating on the carnivorous plant market will get her the biggest revenue boost.

## Profit Is Lumpy

But gross sales isn’t the same as profit. Audrey IIs have a really small markup, because they already cost an arm and a leg, and the market won’t support a high markup. Though the price is high, the profit is low.

The breath mints by the cash register, however, cost her a few cents, and she sells them for several dollars as "artisanal breath mints."

She makes a list of all the products she sells, and how much of the store’s overall profit comes from each product. To her great surprise, 80% of the store’s profit comes from breath mints.