The Pareto Principle

 

The Pareto principle (also known as the 80-20 rule, the law of the vital few and the principle of factor sparsity) states that, for many phenomena, 80% of the consequences stem from 20% of the causes. Business management thinker Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed that 80% of income in Italy went to 20% of the population. It is a common rule of thumb in business; e.g., 80% of your sales come from 20% of your clients. Or 80% of your sales volume comes from 20% of your sales force.

 

We can help you use the rule to focus on more sales!

 

The Pareto principle is only tangentially related to Pareto efficiency, which was also introduced by the same economist, Vilfredo Pareto. Pareto developed both concepts in the context of the distribution of income and wealth among the population.

The original observation was in connection with income and wealth. Pareto's noticed that 80% of Italy's wealth was owned by 20% of the population. He then carried out surveys on a variety of other countries and found to his surprise that a similar distribution applied.

It also applies to a variety of more mundane matters: we wear our 20% most favoured clothes about 80% of the time, we spend 80% of the time with 20% of our acquaintances etc.

 

The Pareto principle has many applications in quality control. It is the basis for the pareto chart, one of the key tools used in total quality control and six sigma. The Pareto principle serves as a baseline for ABC-analysis and XYZ-analysis, widely used in logistics and procurement for the purpose of optimising stock of goods, as well as costs of keeping and replenishing that stock.

 

In computer science the Pareto principle can be applied to resource optimization by observing that 80% of the resources are typically used by 20% of the operations.

 

In business, dramatic improvements can often be achieved by identifying the 20% of customers, activities, products or processes that account for the 80% of contribution to profit and maximizing the attention applied to them.

 

An inverted application of the Pareto principle is the so-called 'long tail' focus in internet marketing. Rather than focusing on the high-popularity keywords for which there is a great deal of competition, some marketers have concentrated on the much larger number of obscure phrases that each get a few searches per month. Creating web pages that are search-engine-optimised for these is a less challenging task than for the small number of popular and highly competitive key phrases.