The Problem with The Pareto Principle

“The Pareto principle … states that, for many events, roughly 80% of the effects come from 20% of the causes.”
– Pareto Principle

While this makes a great sound bite, it’s hard to pin down exactly where the Pareto Principle should be applied – and where it shouldn’t. The definition is loose enough (“for many events”) that it can be – and frequently is -applied to whatever situation a writer or speaker desires.

As with many “facts”, it’s easy for “experts” to trot it out as common knowledge, without providing any demonstration of how it relates to the case under discussion. If you’re trying to streamline your work-day and boost your income, you might have come across authors telling you “facts” like these:

  • 20% of your clients pay 80% of your income.
  • 20% of your output produces 80% of your income.
  • 20% of your time produces 80% of your income.

Whenever you see the Pareto principle cited, ask yourself “Is this true?” I’d argue that, “for many events”, it just isn’t – don’t believe everything you read. Examine your own history of similar situations to see if the 80/20 rule is contradicted by your experience – in my freelance work, I’ve often seen instances where the Pareto principle doesn’t hold.  I’ll give you the figures for each of these three claims in turn, so you can see how the clients/output/time to income ratio works for me.

80% of income from 20% of clients?

In my freelance writing, I currently have the following clients:

  • Client A pays me $420/month (blog)
  • Client B pays me $400/month (blog)
  • Client C pays me $80/month (blog)
  • Client D pays me $40/month (blog)
  • Client E pays me $284/month (magazine article)

Total monthly income from freelance writing: approx $1,224.

So, does the Pareto principle hold true for my freelance writing? Does 80% of my income come from 20% of my clients? There are indeed 3 main clients out of the 5 which make up 90% of my income from freelance writing, and just based on this information, we might conclude that we see the Pareto principle at work here.

If we accept the advice that we should focus our efforts on the clients that provide the most income and fire the rest, it may appear that I should focus my efforts on clients A, B and E and fire C and D.

This analysis however misses some important details:  client C and D require me to produce less, take up correspondingly less time, and may be in a position to take extra work from me in future.  Dropping the two of them because some expert told me “the Pareto principle says so” would be a bad idea, and close the door on potential future income.

It is possible, however, that even if Pareto shouldn’t be applied on a client level, perhaps some of the freelance work I do is more lucrative than the rest.

80% of income from 20% of output?

If I divide up my monthly writing income by what I’m paid per piece, the figures also appear, at first, to come close to fitting the 80/20 rule: My four blog clients pay an average of $40 per article, and I’m writing a total of 23 blog articles per month. I do have one “big” client, though, where my pay per article is seven times my average pay for a regular blog article: my magazine client, who pays $284 per article.

This means that 5% of my writing outputs produces 23% of my income. This definitely comes closer to what the Pareto principle predicts – especially as many people say that the 80/20 figures can be adjusted to suit.  The easy conclusion to draw from this analysis is if I could write five magazine articles per month, I could replace my other income streams entirely.

But now, I haven’t taken into account the fact that the magazine article takes at least four times as long to research and write as a blog article. Nor have I accounted for the time spent in acquiring new magazine clients (I sent out a lot of queries a month or two ago, and didn’t manage to get a single article commission).

Why chase new clients you ask, why not just write more articles for the client you already have?  My current magazine client doesn’t want five times as many articles from me.

Pareto might hold true on the surface, but looking at just the outputs ignores the time factor: how long I spend researching and writing each piece, how long I spend on administration, and the amount of time required to acquire the client.  It further ignores market considerations (how many articles I can sell to one publication).

As the above discussion shows, just looking at outputs is misleading because such an analysis ignores the amount of time spent to produce each output.  This then leads to the following question – if we are saying the Pareto principle is misapplied when judging solely by the quantity of writing outputs produced, does it hold for time to produce those outputs instead?

80% of income from 20% of time?

So perhaps I should be looking at whether I can produce 80% of my income in just 20% of my working day. Is 80% of my time wasted, and does the other 20% of my time produce most of my income?

Unfortunately, the answer here is again a clear “no”. I kept a detailed time log for a couple of weeks last month, and found that I averaged:

  • 40 minutes to write a post (pay varies slightly from $35 to $50 per post, but the time spent varied correspondingly)
  • 5-10 minutes to edit each post
  • 5-20 minutes to format, upload and “administrate” each post (includes tasks like HTML code, finding images, answering comments, emails)

The figures were fairly consistent across the different blogs, and though some activities do not directly produce income (such as answering comments), I consider them a part of the job of producing a blog post, and further recognize that good communication with a blog editor and readers is a point in my favor when an editor is considering keeping me on.

Of course, some of my day was spent in activities like checking and answering emails and reading RSS feeds, but these sorts of tasks typically take up 20 – 30% of my work day – not 80%. On the whole, based on these three examples, the Pareto principle does not hold true, in any meaningful way, for my freelancing.

Why Pareto Doesn’t Work For Effective People

The Pareto principle often gets cited as a convenient shorthand for cutting down on time-wasting activity, spending, or unproven marketing, and for focusing on what’s truly important. This is good advice, but it doesn’t need to be tied to particular numbers. It’s also not very useful if you’re already working effectively.

For example, if you’ve outsourced your time-consuming administrative tasks in order to focus on what you can excel at, then you’ll probably find that 20% of your work time produces 20% of your income and 80% of your work time produces 80% of your income… which you can’t improve on!  In cases when a system (and that system could just be “you going about your workday”) is working effectively, it could be actively harmful to start trying to obsessively tweak it.

If you start searching for that mythical 20% that should be delivering 80% of your results, then you might find yourself cutting out activities which are actually essential to your success. Some of these may seem insignificant if you’re just looking at how much money is coming in, but are important in the long-term:

  • Effective support for customers – it may cost you time/money but builds up repeat business and good word-of-mouth marketing.  Good support will help to keep your churn rate down and avoid losing customers.
  • Taking the time to be friendly and helpful towards clients – maybe sending holiday or birthday greetings, forwarding them articles they would find interesting, and providing a professional opinion when asked.  In situations where a client can choose from multiple equally competent service providers, this sort of relationship often makes the difference.
  • Reading journals, books, blogs and articles in your niche.  While such metawork should not be used as an excuse to avoid real work (such as writing articles), to stay on top in your profession you’ll need to keep up with the direction the field is taking, and continuously honing your skills.

I’m sure you can think of dozens more examples. In certain cases, it’s very hard to pin down exactly which actions may result in a sale, a new client, or a “eureka” moment down the road – so don’t become focused on optimizing everything at all costs.

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Rather than using the Pareto principle as a hard-and-fast rule, use it as a reminder to take stock once in a while. Look at what you’re doing over the course of a day – keeping a time log can help you to do this accurately – and consider where your time is being spent ineffectively.

Your Experience With the Pareto Principle

Do you have a great example of the Pareto principle in action, in your own life or business?  Did you really discover that 20% of your clients provided 80% of your income?  Or do you find in certain situations you are working effectively enough that Pareto doesn’t apply?

P.S. This post is by Ali Hale. I promise we’ll have a better Author box up soon ;) – Sid

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