David Pereira Product Leader with 15+ years of experience. Partner at Value Rebels and interim CPO at omoqo. Almost every product team is trapped somehow; untrapping them is what drives me.

What is the 80/20 rule (Pareto Principle) in business?

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What Is The 80/20 Rule (Pareto Principle) In Business?

How often do you get trapped in discussions that have no outcome? Sadly, I have gotten myself stuck in those situations more frequently than I’d like. Why does that happen?

In my experience, people tend to second-guess the obvious and right answer and assume that it is incorrect. They usually opt to invest more time into searching for more valuable options, but they always circle back to their initial choice. Do we really need to waste all of this time and resources? Short answer, no we don’t.

Using and applying the 80/20 rule, also called the Pareto Principle, in your business will skyrocket your growth with minimum resource waste. Let me tell you a true story of how and why the 80/20 rule helped a startup rapidly grow.

Table of contents

What is the 80/20 rule?

The 80/20 rule means that you often need 20 percent of the effort to create 80 percent of outcomes, and then 80 percent of the effort to create the remaining 20 percent of outcomes.

The 80/20 Rule Example

For example:

  • 20 percent of customers bring 80 percent of your total revenue
  • 80 percent of complaints come from 20 percent of customers
  • 20 percent of your features are used by 80 percent of your customers
  • 20 percent of marketing investments lead to 80 percent of new customers
  • 20 percent of your products drive 80 percent of your revenue

Despite this rule, it is important to learn when it is profitable to pursue the remaining 20 percent, and when you should ignore it. Also, it is important to understand how to avoid trapping your teams into abstract discussions that create no progress.

“Things that matter most must never be at the mercy of things that matter least.” — Johann Wolfgang von Goethe

Identifying opportunities to apply 80/20

A few years ago, I joined a startup that focused on car sales. Our mission was to help car owners quickly sell their cars hassle- and stress-free.

The business model was quite simple. We connected car dealers to car owners through an auction platform. Car owners would come to our inspection points and we’d inspect the cars to put them in our auction platform for an hour. After that, we’d make an offer to the car owner, who could accept the offer or reject it.

When I joined the startup, the platform was in place and the business was running, but something shocked me: car owners rejected 90 percent of our offers. To understand why the offers were getting rejected, I put myself into the shoes of a car owner.

I scheduled an appointment and drove my car to an inspection point. This is what I learned:

  • After handing my key to the inspector, nobody talked to me for about an hour
  • While waiting, I noticed that the other car owners grew impatient and continuously asked the receptionist about the status of their car
  • When the negotiator finally called me, not only was I already tired of waiting, but the negotiator began with the problems of my car before even stating the offer; I was annoyed and did not want to accept the offer despite how much it was

The problem was clear to me: customers disliked being out of the loop.

To fix the problem, we could go one of two routes: we could either come up with a state-of-the-art solution or do something quick and dirty. After sharing my observations with developers, we came up with some ideas.

Applying 80/20

The situation was clear: a 90 percent rejection rate and angry customers damaged the business’ reputation. I wanted to increase transparency to help customers convince themselves it was a good deal to sell their cars.

Initially, a developer suggested, “We could build a mobile app, create authentication, and let customers see information about their auction.” Although that sounded reasonable to me, it didn’t sound like 80/20.

I wanted something doable in a couple of days. The business was dying, and we had to resurrect it immediately.

A developer then raised their hand and said, “I can build a page today with the status of all the cars and put some info there like the dealers in our database, dealers online, amount bids, and maybe the difference between the first and last bid.”

What caught my attention was “today.” I gave them the go, and after two days, the page was up and running. Even though the page was simple and rudimentary, we saw positive effects immediately following the page’s release. The customers were no longer getting annoyed in the negotiation room.

After only a week with this page projected on the TV in the waiting room, our rejection rate dropped from 90 percent to 80 percent. A 10 percent decrease is a significant improvement after only a week.

Building on this initiative, another developer suggested, “We put together a page where the car owner inputs the car plate, and then we show the inspection and auction details?” I liked the idea and gave it the green light. After it was finished, I used it at one of our inspection points.

The customers could see a funnel, the total number of dealers online, how many dealers visualized the car, and how many placed a bid. On top of that, the car owner could see the complete inspection, including the issues identified with the vehicle.

Surprisingly, car owners came to the negotiation room with a different mindset. They knew how attractive the car was for dealers and they knew the issues in their cars. Our rejection rate then dropped from 80 percent to 70 percent.

When should you invest in the additional 20 percent of the results?

Although our results considerably improved, our solution was still rudimentary. Through our simple solution, we learned that it was a problem that could be further fixed with additional effort. I set some audacious goals with management and aligned with the team to pursue them.

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We put additional effort into the layout and functionalities of our product, but fell into several rabbit holes along the way. The more we tried, the more complicated it got and the fewer outcomes we produced. We were stuck and the worst part is that we didn’t know why it was happening.

In an attempt to find a solution, I partnered with an experienced ux researcher. I conducted interviews, shadowed other researchers, and did prototype testing, among other things. It turned out that customers didn’t care about our layout or details. They just wanted the information we had already provided.

Despite investing two more months into improving our business experience, we didn’t manage to go any farther than when we started. Our initial improvement happened in around two weeks and decreased our rejection rate 20 percent from 90 percent to 70 percent, but the additional two months of effort decreased the rate only 15 percent.

What we learned from this situation is that there is only so much you can achieve with certain solutions. At some point, you must analyze your choices and understand which ones are reasonable to invest more time into and the ones that don’t need it.

You may think that my approach is shallow, and that I give up too fast, but I’d say I’m pragmatic and realistic.

It’s fundamental to understand how much change you can still foster. In our case, the rudimentary solution was good enough for our customers. They didn’t care about how it looked, or the user experience, in that aspect all they cared about was the information they were getting.

Something that could have been better benefited by our efforts would have been improving our auction competition. Our customers cared about the offers they were receiving, so improving this could have further decreased the rejection rate than the efforts toward UX did.

Learning to understand what is good enough is vital to success because it enables you to focus on opportunities that can create better results instead of getting stuck on situations you can barely change.

Final Thoughts

80/20 is my mantra. I am continuously reflecting on whether I’m investing in something worthwhile or putting too much effort to get too little result.

It’s critical to face reality as it is. Otherwise, you may get trapped by your imagination. There’s only so much you can achieve with specific opportunities. At some point, you’ve got to move on to where your energy is better spent.

The critical elements of 80/20 are:

  • Outcome — Identify which result you want to create and focus solely on that
  • Simplicity — Strive for simple solutions to create the outcome you’re pursuing
  • Progress — Movement is better than a shiny presentation; develop a bias towards action
  • Satisfaction — Know when to stop investing in something; evaluate your choices and pick the one with more chances of creating higher value

Four Critical Elements Of 80/20

You will often see that pragmatism will unlock business growth beyond saving time and nerves.

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With LogRocket, you can understand the scope of the issues affecting your product and prioritize the changes that need to be made. LogRocket simplifies workflows by allowing Engineering and Design teams to work from the same data as you, eliminating any confusion about what needs to be done.

Get your teams on the same page — try today.

“The reasonable man adapts himself to the world. The unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man” — George Bernard Shaw, Man and Superman

David Pereira Product Leader with 15+ years of experience. Partner at Value Rebels and interim CPO at omoqo. Almost every product team is trapped somehow; untrapping them is what drives me.

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