The Pareto Principle (80/20 Rule) — PM Mental Model #7
The Pareto Principle, also known as the 80/20 rule, is a concept frequently applied in various fields including economics, business, and management. It was at university studying Economics that I first heard of the rule and its fascinated me ever since.
The principle originates from observations by Italian economist Vilfredo Pareto in the 19th century. Pareto noticed that approximately 80% of the land was owned by 20% of the population. Over time the principle has been observed and indeed applied in various fields. Research suggests the 80 / 20 rule is a widespread natural occurrence seen over and over again, some examples include:
- Biodiversity, a study by Joachim Merz found that 80% of species biomass is often concentrated in 20% of the available habitat.
- Economic Equality. Aaron S Edin’s study showed that wealth and income distribution often follow the Pareto principle with approximately 80% of wealth owned by 20% of the population.
- Healthcare, studies have shown that approximately 20% of patients account for 80% of healthcare costs
- Natural Disasters, in disaster risk management it has been found that 20% of extreme events account for the majority (80%) of damages and losses.
In Product Management, Richard Koch author of “The 20% Rule” discussed how 20% of features drive 80% of customer engagement. The implication, of course, is that Product Managers need to identify and concentrate on that 20% to create maximum value from the effort, easier said than done. However, the principle can be applied in the many of the circumstances and problems Product Managers face.
Here is the Mental Model for Product Managers:
1. Feature Development & Prioritization:
- Identify the 20% of features that deliver 80% of the value to users.
- Use Data Analysis and user feedback to determine which features are most used or requested by customers, focusing development efforts on refining these key features.
2. Bug Fixing and Technical Debt Management
- Apply the Pareto Principle to prioritize bug fixes and address technical debt. Focus on resolving the critical 20% of bugs that cause 80% of user-reported issues or impact product performance significantly
- Allocate resources to refactor or address technical debt in the most critical areas of the product architecture that contribute to most maintenance challenges or hinder future development.
3. User Acquisition and Retention:
- Identify the 20% of marketing channels or strategies that drive 80% of user acquisition. Allocate resources and budget to optimize these high-performing channels to maximize return on investment.
- Focus on retaining the critical 20% of users who contribute 80% of the recurring revenue or engagement metrics. Develop targeted retention strategies to nurture and retain these valuable customers effectively.
4. Market Segmentation and Targeting:
- Segment the target market based on the Pareto Principle focusing efforts on the 20% of customers that generate 80% of the demand or revenue.
- Tailor product messaging, features, and marketing campaigns to address the specific needs and preferences of these key customer segments, maximizing the product’s appeal and relevance.
5. Product Roadmap Planning:
- Use the principle to guide product roadmap planning by focusing on the critical 20% of initiatives or projects that align with strategic goals and have the highest impact on product success.
- Evaluate potential features, enhancements, or partnerships based on their potential to address the most significant user needs or opportunities, prioritizing those with the greatest potential for positive outcomes.
Easier said than done, I know!! So how can product managers identify the 20 or 80% they are looking for? Here are some techniques they can use:
1. Data Analysis
- Conduct comprehensive data analysis to identify patterns, trends, and correlations in use behavior, usage metrics, and product performance indicators.
- Utilize analytics tools to track user engagement, feature usage, conversion rates, retention metrics, and other key performance indicators.
- Identify the top-performing features, user segments, acquisition channels, and product workflows that contribute the most to overall product success
2. User Feedback & Research
- Gather qualitative feedback from users through surveys, interviews, usability testing, and customer support interactions.
- Identify recurring themes, pain points, and feature requests voiced by users to understand their needs, preferences, and priorities.
- Prioritize feedback from the most valuable or representative user segments that align with strategic goals and target market demographics.
3. Impact Analysis:
- Assess the potential impact of different product initiatives, features, and improvements on key business metrics and user outcomes.
- Use techniques such as A/B testing, multivariant testing, or cohort analysis to measure the incremental impact of changes on user behavior, conversion rates, and retention.
- Focus efforts on initiatives with the highest potential for driving significant improvements in user satisfaction, engagement, and business outcomes.
4. Strategic Alignment:
- Align product initiatives and feature development with the company’s overarching goals, vision, and value propositions.
- Evaluate how each potential effort contributes to strategic objectives such as growth, market expansion, customer acquisition, or competitive differentiation.
- Prioritize initiatives that align with the company’s long-term vision and have the greatest potential for delivering substantial value to users and stakeholders.
5. Iterative Refinement
- Continuously iterate and refine product strategies, features, and initiatives based on ongoing data analysis, user feedback, and market insights.
- Regularly reassess priorities and adjust resource allocation to focus on the most impactful efforts in light of evolving user needs, market dynamics, and competitive landscape.
In conclusion, the Pareto Principle, or the 80/20 rule, offers invaluable insights for Product Managers seeking to maximize the impact of their efforts and resources. By focusing on the critical 20% of initiatives, features and optimizations that deliver 90% of the value, Product Managers can drive significant improvements in product performance, user satisfaction, and business outcomes.
Through a combination of data analysis, user feedback, strategic alignment, and iterative refinement, Product Managers can effectively identify the most impactful areas for investment and optimization. By prioritizing efforts that align with strategic objectives, address user needs, and deliver tangible value, Product Managers can steer their teams toward success in a competitive marketplace.
Moreover, embracing the Pareto Principle fosters a culture of efficiency, innovation, and continuous improvement within product teams. By regularly reassessing priorities, iterating on strategies, and focusing resources on high-impact initiatives, Product Managers can drive sustainable growth and maintain a competitive edge in an ever-evolving landscape.
Ultimately, applying the Pareto Principle in product management empowers Product Managers to make informed decisions, allocate resources effectively, and deliver exceptional products that resonate with users and drive long-term success. By identifying the critical 20% of effort that generates 80% of the value, Product Managers can unlock the full potential of their products and propel their organizations towards greater heights of achievement.
Additional Reading:
- “The 80/20 Rule and How It Can Change Your Life” by Richard Koch (Lifehack) — Koch provides insights into how individuals can apply the Pareto Principle to achieve more with less in various aspects of life.
- “The 80/20 Rule: How the Pareto Principle Can Transform Your Life and Business” by Taylor Pearson (Medium) — Pearson explores the implications of the Pareto Principle for personal and professional success, offering practical tips for implementation.
- “The 80/20 Rule of Project Management: How to Make the Most of Your Time and Resources” by Wrike — This article discusses how the Pareto Principle can be applied to project management for better resource allocation, risk management, and project outcomes.
Links to the other blogs in this series:
The Five Parts to Every Business — PM Mental Model #1
The Flywheel Effect — PM Mental Model #2
Artificial Intelligence Use Cases — PM Mental Model #3
Good Product Manager, Bad Product Manager — PM Mental Model #4
