Making money with the 80/20 rule a "logical fallacy"?

5 replies
I've been reading about the 80/20 rule in one of the current marketing books I'm reading (although it's in a gazillion books).

It says you get 80% of "x" from 20% of "x". We all know this (or should). And I know it's a good rule because it tends to hold true. I get that of course.

You make 80% of your money from 20% of your customers. It's just a loose way of categorizing information to make it more useful. And you can obviously swap out different examples.

But, am I going crazy here? Doesn't anyone else have a problem with the discrepancy?

It's comparing two sets of data. So it doesn't have to add up to 100 like it does. Why can't it be 85% of my money comes from 30% of my customers?

I know the loose rule is that in your situation it could be 75/25 or 68/32 or whatever. But why is it supposed to add up to 100?

Before you jump down my throat for over-analyzing, I know I'm nitpicking. But I just want to know if anyone else notices this? Because while maybe nobody else cares…my brain works that way.

And I don't want to feel (as) crazy (as I am).

Sure I check the lock six or seven times even though I know it's locked. (I'm getting better.) And I stop walking when I have to think seriously about something. (Wife hates it. No one can talk to me, and I have to make notes about what I'm thinking about for later before I can jump back into "real life" and keep walking.)

I've got probs.

So I'm just wondering if you noticed too. And if I've got the math wrong, it'd be a relief to know that too.
#80 or 20 #logical fallacy #making #money #rule
  • Profile picture of the author Frank Donovan
    Hi Nathan,

    As you say, the 80/20 rule is just a rough guide, but it's surprising how often it turns out to be accurate.

    In your example, of course you could have 85% of your business from 30% of customers. The figure only needs to add up to 100 when you talk about the totality of your business.

    So what you're also saying is that the other 15% of your business comes from the remaining 70% of customers.

    The point is that, overall, we assume 100% of your business comes from 100% of your customers.

    HTH


    Frank
    Signature


    {{ DiscussionBoard.errors[3155813].message }}
  • Profile picture of the author profitsforall
    I suspect it's just a catchy number that will stick in your mind easier than some others, to explain a simple concept.

    People say it's proven and true - but I know that I have never specifically tested if indeed 20% of my customers are responsible for 80% of my sales. Is it just a case of us fitting things to the rule e.g we notice when it seems to fit the rule but discard when it doesn't.

    (like the i before e except after c rule that has an incredible number of words that make this rule completely useless).


    Besides I've heard that 79.23422 % of all statistics are made up - mine certainly was.
    {{ DiscussionBoard.errors[3155856].message }}
    • Profile picture of the author Michael Shook
      It is called a rule but is really a statistical type of tendency and most of the usefulness of statistics comes from their predictive value rather than what has happened (unless you are having a bar bet over some sports thing)

      The numbers are a rough guide, the basic idea in Juran's original application came from a study by Pareto about land ownership in Italy. 20 percent of the people owned 80 percent of the land and since then it has been incorporated into a lot of other areas as a shortcut way to manage things.

      The idea of knowing this is to spend more of your time concentraing on the things that are most important to your business. Like taking care of the 20 percent of teh people who bring you the 80 percent of your income.

      And if you can do it in your business model, letting go of the 20 percent of the people who give you the 80 percent of your problems. Don't make yourself crazy over it, your business does not have to follow this, there is no rule that says it must. This is simply a generalization made for ease of management and your business might be different.
      Signature


      {{ DiscussionBoard.errors[3155920].message }}
      • Profile picture of the author joshua1220
        I am wonder if anyone has empirical evidence for the 80-20 Principle, other than Pareto's evidence. I would like to see the data if someone has it.
        {{ DiscussionBoard.errors[3232375].message }}
  • Profile picture of the author Nathan Alexander
    Ah...very nice.

    Any smartness I have stopped at the second part. Thanks Frank. Good call. (Wish I would have seen that far.)

    Nathan
    {{ DiscussionBoard.errors[3155861].message }}

Trending Topics