The Pareto Principle (also known as the 80–20 rule) states that, for many events, roughly 80% of the effects come from 20% of the causes. It is named after Italian economist Vilfredo Pareto, who, in 1896 published a paper that showed that 80% of the land in Italy was owned by 20% of the population. Pareto developed the principle by observing that 20% of the peapods in his garden contained 80% of the peas.
It is a common rule of thumb in business; e.g., “80% of your sales come from 20% of your clients.”
For businesses the Pareto principle produces the following insights:
- 80% of a company’s profits come from 20% of its customers.
- 80% of a company’s profits come from 20% of its staffs working hours.
- 80% of a company’s sales come from 20% of its products.
- 80% of a company’s sales are made by 20% of its sales staff.
Changes that businesses can implement to improve their profitability immediately and benefit from the Pareto Principle includes:
- Focusing the activities of staff, management and resources on the top 20% of customers.
- Getting rid of the customers with the lowest 20% spend. (These customers are unprofitable and cost the company money to service).
- Phase out the 20% of the products or services that have the lowest sales or uptake. These products cost the company money.
- Dismissing the lowest performing 20% of staff.
By applying the Pareto Principle businesses have the opportunity to maximise improvement with the minimum amount of effort, cost and time.