The 80-20 rule

Owned by Eliot Muir
Last updated: Sept 22, 2021 by Tyler Brown
1 min read

This is a recurring pattern that comes up again and again in systems.

Applied to products, for most companies 80% or more of revenue comes from 20% or less of the products that a company sells.

Knowing this allows one to prioritize effort when time is limited - if most of the revenue and profit comes from small percentage of the products that a company sells, then if there is a business problem to be solved it probably makes sense to focus most of ones effort and attention on the 20% of the products which matter.

Same applies to cost drivers. If a product takes say 3 inputs to manufacture but the percentage of cost of each input is vastly different i.e.:

  • A is 45%

  • B is 49%

  • C is 1%

Then one can simplify the problem by only worrying about the cost of inputs A and B and ignore C because the cost of C contributes very little to the overall price.

80-20 rule applies to many many other things like CPU design, how people use software products and so on.

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