What is the Pareto Principle? Learn How to Achieve More with Less

The Pareto or 80 20 Principle

The pareto principle tells us that some things are going to be more important than others. Simply 20 percent of the causes yield 80 percent of the results or problems.

Fundamentally here is what happens:

  • 20% inputs give 80% of the outputs
  • 20% of the causes give 80% of the consequences
  • 20% of the effort give 80% of the results

Some examples would be:

  • 20% of the customers give 80% of the profits
  • 20% of the products gibve 80% of the sales
  • 20% of the staff give 80% of the output of the company
  • 20% of the consumers use 80% of the product or services offered

For example, by concentrating your efforts on say the 20% of the customers who give you 80% of your business, your returns will be significantly higher than chasing customers in 80% group who only give you 20% of your income. This gives you a great clue to how you should select and foster customers.

Please note this law sometimes works out to be for example 70/30 or 90/10 and it seems to be a law of nature everything in the world seems to fall into this pattern.

Example from a Software Company

Software Company chart example

Click here to see a Pareto Chart example from the quality improvement area.

As you can see above understanding where these imbalances are in a business or organisation and leveraging them is a vital productivity or improvement lever. It is probably the most important concept for a business intelligence professional to understand and apply.

It aslo vitally important to anyone creating a business strategy It is equivalent to the concept of constantly always 'building on the best and disposing of the least successful'. This rule is the key to finding the best.

This 80 20 imbalance in any population really indicates that in the world things are not evenly distributed as one might think. This concept is not intuitive. Note, the imbalance does need to add up to 100. It can do like 70/30 but often it can 90/30, 50/10 or 80/28.

Who discovered this Principle - Guess Who?

The concept was first discover by Vilfredo Pareto, an Italian economist, over 100 years ago. It has been reinvented by Zipf in 1949 using the term 'Principle of Least Effort'.

lso known as the 80/20 rule, the law of the vital few, or the principle of factor sparsity. For example, the Principle claims that only a "vital few" peapods produce the majority of peas.

Read more about Pea Pods

In 1951 Joseph Juran, the great quality Guru, used the principle to improve quality by using it to identify the faults or defects that were having the biggest impact.

Every business intelligence practitioner, manager and leader should think and act 80 20.

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