The 80/20 Rule Isn't Pareto's.

What Pareto was looking at

In the 1890s Vilfredo Pareto, an engineer turned economist teaching at Lausanne, gathered income-tax records from England, Ireland, Prussia, Saxony, several Italian cities, Basel, Augsburg and Peru. For each one he plotted an income level against the number of taxpayers earning more than it, with both axes on a logarithmic scale.

What he found

The points lined up.

“Nous sommes tout de suite frappé du fait que les points ainsi déterminés, ont une tendance très marquée à se disposer en ligne droite.” Pareto, Cours d’économie politique, vol. 2, §958, pp. 304–305. In English: we’re struck at once by how strongly the points tend to fall in a straight line.

Every country’s line had a similar slope. In his table the slopes run from 1.13 to 1.89, across countries and centuries, with England in 1843 at 1.50. He didn’t think that could be luck:

“Il est absolument impossible d’admettre qu’ils sont dus seulement au hasard.” §960, p. 312. In English: it’s absolutely impossible to accept that they’re due to chance alone.

A straight line on those axes is the signature of a power law. A small number of people at the top hold a share of the total far out of proportion to their number, and the pattern repeats however far up the scale you go.

What Pareto didn’t write was “80/20.” That came half a century later, from a quality engineer named Joseph Juran. At General Motors in the late 1930s, an executive showed him that GM’s executive pay fit one of Pareto’s models. “The fit was surprisingly close,” Juran recalled. He saw the same shape in manufacturing defects, where a few causes produced most of the problems, and in his 1951 Quality-Control Handbook he called it the Pareto principle. Years later he wrote a correction:

“I was forced to confess that I had mistakenly applied the wrong name to the principle.” Juran, “The Non-Pareto Principle; Mea Culpa,” Juran Institute reprint, p. 1

“The Pareto principle as a universal was not original with Pareto.” Same, p. 3

What it means

The shape is the finding. “80/20” is a nickname for it, not a law with a fixed ratio. Some books are more concentrated than that and some less. A study of more than 100,000 grocery households found the top fifth of a brand’s buyers carry about 73% of its volume, higher for niche brands and lower for big ones.

The useful question about your own business isn’t whether it’s exactly 80/20. It’s whether it’s a power law at all. If it is, the average account describes almost nobody: a few large accounts pull the average up, and most accounts sit below it.

Where it shows up in a revenue team

• The average deal. In a power law, most deals are smaller than the average deal, so a plan built on the average assumes a mix you don’t have.
• Targets set on averages. Cost per acquisition, quota and payback targets all inherit the average, which is carried by the few.
• Checking your own shape. Split your accounts at the average value, then split each half at its own average. If a small share of accounts sits in the top groups and carries most of the revenue, you’re looking at Pareto’s line.