First, let’s understand what the 80/20 rule is. Vilfredo Pareto was an Italian sociologist, economist and philosopher who lived from 1848-1923. In 1906, Pareto observed that 80% of the land in Italy was owned by 20% of the population. An avid gardener, he also noticed that 20% of the pea pods in his garden produced 80% of the peas.
As an economist, Vilfredo studied the patterns of financial wealth and income in nineteenth century England and again found these same 80/20 proportions in how wealth was distributed: 20% of the population had 80% of the country’s wealth. Through further observation he found that everywhere he looked a similar pattern emerged. That is, roughly 80% of effects come from roughly 20% of the causes. What he had found was that nature was predictably unbalanced.
“We tend to assume that 50% of causes or inputs will account for 50% of results or outputs. There seems to be a natural, almost democratic, expectation that causes and results are generally equally balanced. And, of course, sometimes they are. But this “50/50 fallacy” is one of the most inaccurate and harmful, as well as the most deeply rooted, of our mental maps. The 80/20 Principle asserts that when two sets of data, relating to causes and results, can be examined and analyzed, the most likely result is that there will be a pattern of imbalance. The imbalance may be 65/35, 70/30, 75/25, 80/20, 95/5, or 99.9/0.1 or any set of numbers in between.” – from The 80/20 principle
Let’s look at some ways the 80/20 rule manifests itself in the real estate world:
- 20% of sales reps make 80% of all sales commissions
- 20% of your clients deliver 80% of your income
- 20% of the time you spend on your business yields 80% of your income
Here is the flip side of the above:
- 80% of sales reps makes 20% of all sales commissions
- 80% of your clients only deliver 20% of your income
- 80% of the time you spend on your business only yields 20% of your income