What is the Pareto Principle?

The Pareto Principle is named after Italian economist Vilfredo Pareto, who in 1906 observed that 80% of land in Italy was owned by 20% of the population. He expressed this surprising observation in a mathematical formula that is now commonly known as the 80/20 rule. The 80/20 rule states that in any given situation 80% of the outcome is produced by 20% of the input. Otherwise known as the vital few and trivial many, the Pareto Principle can be applied to a range of areas in business to ensure that business processes is functioning to its full potential.

So… how can it help me?

1. Increased Productivity

The Pareto Principle is extremely useful for determining which areas to focus your efforts and resources on in order to achieve maximum efficiency.

By utilising the 80/20 rule, individual employees can prioritize their tasks so that they can focus on the critical 20% that will produce 80% of the results. Of course, this is not an indisputable figure, but the Pareto Principle teaches employees to not waste time on the ‘trivial many’ that will not contribute to the long term goal and to focus their resources on the ‘vital few’ that will produce the majority of the results.

Similarly, the Pareto Principle can be used to identify the causes of unproductiveness in the workplace.

As a manager, you can utilize the 80/20 rule to establish the 20% of causes that result in 80% of the unproductivity and subsequently take appropriate measures to resolve the issues causing unproductivity.

Common examples of causes of unproductivity in the workplace include: social media distractions, unskilled workers in their field or an unsuitable work environment. Of course, the issues for unproductivity vary with each individual employee, but the Pareto Principle can help you identify and resolve these issues.

2. Increased Profitability  

Regardless of the type of your business, it is a common occurrence in any business that roughly 20% of your salesmen produce 80% of your sales. Depending on your end goals, the Pareto Principle can be utilised to determine whether you need to focus your effort and resources on the 20% of staff that produce most of your sales to further improve their skills or to focus on the 80% of other employees that are struggling to bring in any sales.

Also, the Pareto Principle indicates that a small percentage of your total amount of customers produce the majority of revenue. Similarly, only a handful of your products and/or services attract the most sales. As such, analyzing the leads and current customers you have can help you determine which ones have produced the most revenue in the past so that you can focus on pursuing only the most valuable leads. Further, discontinuing the products/services that don’t generate revenue and focusing on improving the ones that do can be ultimately more beneficial for the business.

3. Website Optimization

The 80/20 rule suggests that a standard overview at your business’s website analytics will indicate that roughly 80% of traffic lands on 20% of your website pages. The 20% of pages that attract the most views are generally the critical pages that display content in relation to the purchasing process of your product or service. Using the Pareto Principle to analyze how traffic flows through your website will allow you to optimize it to ensure that it is straight forward for your viewers to access the critical pages of your website. This is not only proven to increase sales, but it also allows your business to grow at a faster rate with lower amounts of traffic.

The marketing efforts you conduct on your website can be analysed to show that roughly 20% of your marketing strategies bring in 80% of the results. So, by building upon the marketing strategies that are proven to be effective you can draw more attention towards your business.

4. Identify and Fix Problems

A Pareto chart is highly useful for prioritizing problems so that you can determine which issues have the greatest effect on the outcome of a given situation. This not only allows you to identify problems, but it also enables you to take appropriate actions to resolve the most important issues concerning your business.

The appearance of a Pareto chart is quite straight forward with vertical bars plotted in decreasing order in relevance to their relative frequencies. The higher the frequency, the greater the impact it will have on your business – so, it is crystal clear where you need to focus your attention on to improve your business. The Pareto chart is an excellent way to pinpoint the issues affecting your sales, productivity and overall success of the business.

5. Improve Customer Service

Customer support is a crucial aspect of any business so it is prudent to ensure that your customers are satisfied with the customer service they receive. The Pareto Principle indicates that 80% of customer complaints are related to 20% of your products/services, so a proper analysis of which products/services are causing problems for your business can help you to permanently sort out customer service issues. Also, by utilising the 80/20 rule you can identify which particular customer service staff is associated to the majority of customer complaints so that you can focus on altering the way in which the associated staff interact with customers.

The Moral

The Pareto Principle is not a method to completely eliminate the non-critical aspect of any given situation; rather, it is a simple phenomenon that allows us to shift our focus on the areas that will have the most profound impact on the end goal and will yield the greatest results. It is particularly useful for businesses as it allows you to identify which aspects of your business are not performing to their full potential and thus makes it easier for you to focus on the issues that require the most urgent attention. The most successful businesses utilise the Pareto Principle to ensure that all operations conducted within the business are contributing to the overall success of the business.