In a perfect world, effort would equal reward. If you worked ten percent harder, you would get ten percent more results. The world, however, is not linear. It is lumpy. This lumpiness is described by the Pareto Principle, commonly known as the 80/20 Rule.
The Pareto Principle is the observation that for many events, roughly 80 percent of the effects come from 20 percent of the causes. It was originally discovered by Vilfredo Pareto, who noticed that 80 percent of the land in Italy was owned by 20 percent of the population. He then realized this ratio applied to almost everything, from pea pods in his garden to wealth distribution.
For a startup founder, this is the most important mental model for prioritization. It tells you that most of what you do is useless. Your job is to find the 20 percent that matters and ignore the rest.
The Rule in Action
#Once you look for it, you will see this asymmetry everywhere in your business:
- Revenue: 80 percent of your sales likely come from 20 percent of your customers.
- Productivity: 80 percent of your value is created in 20 percent of your working hours.
- Bugs: 80 percent of software crashes are caused by 20 percent of the bugs.
- HR: 80 percent of your management headaches come from 20 percent of your employees.
Understanding this allows you to make radical decisions. If 80 percent of your revenue comes from 20 percent of your clients, you should fire the bottom 80 percent of your clients. They are distracting you from finding more of the top 20 percent.
The Trap of “Busy”
#Most founders are busy, but ineffective. They treat all tasks as equal. They spend as much time optimizing their email signature as they do optimizing their pricing page.
The Pareto Principle is a license to be lazy about the wrong things. You should actively neglect the 80 percent of tasks that yield low returns.
If you have a to-do list with ten items, two of them are worth more than the other eight combined. If you cross off the bottom eight but miss the top two, you have failed. If you cross off the top two and ignore the other eight, you have won.
Fractal Nature
#The 80/20 rule is fractal. This means it applies inside itself.
Inside the top 20 percent of your customers, there is another 80/20 split. This means that 4 percent of your customers (20% of 20%) generate 64 percent of your revenue (80% of 80%).
This hyper-concentration means that your business is likely dependent on a tiny handful of inputs. Identifying these “Whales” or “Super-inputs” allows you to focus your resources with laser precision.
The Emotional Hurdle
#Applying Pareto is emotionally difficult. It requires you to say “no” to good opportunities because they are not great opportunities. It requires you to fire nice employees who are just average. It requires you to kill features that some users like but don’t drive retention.
It feels safer to try to do everything. But in a resource-constrained startup, trying to do everything ensures you do nothing well. Focus is the art of strategic neglect.