The Pareto Principle states factually that 80% of consequences are a result of only 20% of the causes. The principle has been derived from the imbalance that was shown in the land ownership of Italy. It shows that things are unequal, and the minority is responsible for the majority.
Unlike most principles, the Pareto principle is an observation and not a well-formed law. It is not applicable everywhere.
The Pareto Principle is sometimes called the 80/20 rule and the law of the vital few. The rule has been named after the esteemed economist Vilfredo Pareto. He observed the phenomenon at the University of Lausanne in 1896. It was shown in his study that 80% of the land in Italy was owned by 20% of the population.
In business, this is translated as the fact that 80% of sales are rooted in 20% of the clients. This principle is a reminder of the fact that the relationship between outputs and inputs in never balanced.
The Pareto principle was initially applied to land ownership in Italy, as mentioned above. More generally, the principle applies to all things in life, which are not evenly distributed. There is a wide range of subjects to which this principle might be used. It includes manufacturing, human resources, and management.
For example, we can observe that 20% of any corporation’s staff can drive eighty percent of any firm’s profits. This principle is particularly applicable to businesses that are based on client-service dynamics. Several coaching and customer relationship management (CRM) software programs have made use of this principle.
The principle may also be applied to personal situations. Time management is a raging issue when it comes to the Pareto Principle. People prefer to spread out their time thinly and don’t focus on the more critical tasks. As far as time management is concerned, you will notice that 80% of your work happens with 20% of your time at work.
Examples of the Pareto Principle
- 80% of the value is found in 20% of the effort. It is found in business that teams are working on a project to complete a task very quickly. However, little progress is made in the same project further.
- 80% of the project politics stems in 20% of the brand’s stakeholders. You must have noticed in business that a minority of your stakeholders usually causes political struggle.
2) MANAGING PROGRAMS
- 80% of problems find their origin in 20% projects. You will discover that only some projects prove much more complicated than others.
3) GENERAL MANAGEMENT
- 80% of the work is done by 20% of the members of your team. The gap between performing and non-performing workers is a lot in any workplace.
- 80% of customers make use of only 20% of the software. Most users do not make use of power features. Many users find advanced features annoying and hard to use.
- 80% of software problems result from 20% bugs. It is generally observed that a small number of bugs are responsible for a large number of issues.
5) MARKETING AND SALES
- 20% of your clients are accountable for 80%s of sales. Many companies like to depend on a selected few customers for maximum sales generation.
- 20% of your products are responsible for 80% of your purchases. The diversification of your products has a limited effect on business and revenue.
- 20% of your salespeople make for 80% of your sales. It is difficult to find a workplace where the majority of your salesmen can make a valuable contribution.
- 20% of your customers are the ones with 80% of complaints. It is a commonly observed phenomenon in most workplaces
6) Wealth Management
20% of people own 80% of a country’s wealth. Even today, 20% of the population owns 82.7% of the nation’s wealth. This means that the wealth allocation of the world is extremely narrow. 80% of the people own only 20% of the wealth.
If the government wishes to reform the society, they can use the Pareto Principle in helping to maximize the reallocation of wealth to 80% of the population.
7) In Sports
The Pareto Principle can be applied to athletic training, as well. 20% of the exercises and habits of the athletes lead to 80% of results. The trainee should hence focus on optimizing this 20 % of activities. This rule indicates that the trainee should not spend too much time on varied training.
Even though gyming and healthy diets are essential, they are not as crucial in creating results as key activities. In baseball, the Pareto principle has been observed and noted in Wins Above Replacement. Wins Above Replacement is an attempt to study and compile statistics to determine the overall importance of a player to the team. It was found that 15% of players contribute to 85% of all wins.
The other 85% of players only produce 15% of the wins. Hence, the Pareto Principle is soundly accurate in baseball.
8) General Application
A) Work – If you believe that 20% of your work in done just by showing up, you are applying the Pareto Principle. This helps you in staying focused and can motivate you to start working on projects since just showing interest in starting your project means 20% of the work is completed.
B)Study – A study was done in Dunedin found that 80% of crimes have been committed by 20% of criminals. This statistic is supported by police, as the criminals who commit significant crimes are just 20% of all criminals. 80% of criminals only commit a minor 20% of the crimes.
9) Occupational Health and Safety
Occupational health and safety employees also use Pareto Principe. They use it to manage hazards in the workplace. They state that 20% of risks lead to 80% of injuries. Safety professionals can focus on 20 % of the dangers that lead to 80% of accidents and fix them.
Aside from helping in effective hazard prevention, the Pareto principle helps in ensuring that the haphazard in workplaces are addressed in a fashion that is economical and is best in allocating resources in accident prevention.
Advantages of Using the Pareto Principle
There is a practical reason behind the success of the Pareto Principle at work. It provides a natural gateway into determining who to reward and what price to fix. For instance, if 80% of car crashes happen due to 20% of your faults, then you can find these faults and fix them immediately.
Thus you can understand how to allocate your resources. Given below are some other advantages of the Pareto Principle.
1) Increase in Productivity
The Pareto principle can be used to determine the areas in which you need to focus your efforts and resources so that you may achieve efficiency at its maximum. By using the rule of 80/20, employees can prioritize tasks. This way, they may focus on 20%, which is critically essential for 80% of results.
‘Of course, the data and figures might vary slightly. However, the Pareto Principle teaches not to focus on the trivial aspects of work as they do not contribute to long term goals.
2) Increase in the Quality of Study
You can apply the Pareto Principle in studying, as well. If you are working on research, instead of spending 1 hour drafting your research paper, you can spend 10 minutes thinking of ideas and spend 50 minutes elaborating on the best one.
One more way in which you can optimize your academic performance is, instead of reading three articles in-depth for 3 hours what you can do is; glance through 12 articles for 5 minutes each (1 hour) and read two of the best articles for one hour each (2 hours). In this way, you can apply the 80/20 rules creatively to increase your academic success.
One more way of applying the Pareto principle is the 96-minute rule. This means that knowledge workers should devote their most essential tasks to the 96 minutes and improve their day to day productivity.
3) Identify Problems
The principle may be used to understand the causes behind unproductiveness within the workplace. If you are a manager, you can employ 80/20 rule to discover the 20% causes, which lead to 80% unproductivity. Unproductivity in the workplace can be a result of many factors such as distraction caused by social media, unsuitable work environment, or unskilled workers.
Of course, the issue of poor productivity varies from one workplace to another. One another way to identify problems includes understanding how 20% of the bugs contribute to 80% of data or software crashes. One can focus on fixing this 20% of bugs for the smooth running of the software. Thus, every time you wish to troubleshoot problems, you can make use of the Pareto Principle.
4) Increasing Profitability
It is noticed that in every workplace, 20% of sales associates are responsible for producing 80% sales. Depending on the end goals of your company, you can identify what you want to focus on. If it is 20% of the production staff that needs to be worked with or it is 80% of your remaining employees who need to be improved. The point that you should understand is that you can focus your efforts on the 20% that makes a difference instead of expending energy on the 80% that does not reflect much profitability.
In terms of economics, there is a concept called diminishing marginal benefit. This indicates that each additional hour of effort that a worker does results in each extra worker adding less satisfactory quality to the final result. In the end, you are spending more and more time on minor details. You should instead focus on the 20%.
The Pareto Principle also shows that a small percentage of your total customers are responsible for producing maximum revenue. Similarly, only a few of your products and services attract maximum sales. After you analyze your leads and your current customers, you can determine which section has helped to get maximum revenue.
You can thus focus on generating more valuable leads in the future. If you discontinue the sales that are not profitable, you will also be cutting down your losses.
5) Optimizing Websites
Under the 80/20 rule, it is suggested that the standard overview of your business’s website analytics shall indicate that around 80% of your traffic lands on 20% of the pages of your website. The 20% pages which attract best views are generally the pages that display content which is related to the purchase process of a good or service. You can use the Pareto Principle to establish how traffic will flow through your website. Thus, you can analyze ways to optimize your site. You can make your website more accessible to your viewers.
6) Fixing Problems through the Pareto Chart
A Pareto chart is very useful when it comes to prioritizing problems. You can find out which issues have the most excellent effect on the outcomes of any given situation. It allows you to identify issues and take necessary actions to resolve them which concerns your business.
Drawing a Pareto chart is very simple. The chart is straightforward, with many vertical bars plotted in descending order according to their relative frequencies. The higher the frequency, the greater is the impact that it will have on the business. It is thus clear where you must focus your efforts to improve business.
7) Improving Customer Service
Customer service is a very integral part of your business. It is crucial to ensure that the customers are happy with the customer support that they get. The Pareto Principle is a wonderful way of indicating that 80% of your complaints as a customer are linked to 20% of products and services.
Thus you can figure out which products are creating the maximum problem and resolve these issues. By making use of the 80/20 rule, you can try to identify the particular customer support staff, which is linked to the majority customer complaint. You can thus alter how customers interact with the associated team.
Here is a video by Marketing91 on The Pareto Principle.
Disadvantages of the Pareto Principle
The primary function of Pareto analysis is discovering the causes of events and finding the frequency of the times these events occur. However, there are some disadvantages to using this principle in the workplace.
1) Only Analyses the Past
The Pareto analysis exclusively relies on information from the past, which can be deceptive. Small businesses often discover that the data used in Pareto analysis only reflects the past performances of the company and is no longer relevant.
For example, a set of data might represent the changes in the raw material that have occurred in the past. But it does not tell anything about the frequency and direction of changes in the future.
2) Problem Solving is Inaccurate
The Pareto analysis only gives a quantitative relationship between cost output and input. Small businesses will find that some cost centers are proving costly to the company. They then proceed to cut out the costs of this cost case. However, often, these cost centers may be very vital for the working of the business. In this case, cutting the costs of this process might prove harmful to the brand.
Thus, you cannot depend on the Pareto analysis to determine which method has the highest priority. It is essential to analyze the quality of the process and then assess its importance.
3) It May Not Always Be Applicable
The 80/20 split was valid and applicable for Pareto’s observation. However, it may not necessarily always be true. For example, there could be 30% of the workforce (30 out of 100 workers) completing only 60% of the output.
Other workers may not be as productive and may slack off on the job. This situation applies that the Pareto Principle is an observation and not a law.
4) Misunderstood Applications
Businesses often use the Pareto analysis for various purposes. Many times its application is not understood very well and misused. For example, people might want to use this principle on their customers. The people who give maximum profits to the business are about twenty percent of the total clients. A company might want to focus their attention on this group and ignore the rest.
However, it is a very impractical technique at times. If you do not give enough time to all your clients, you might happen to lose most of them. These clients can be potential profits in the future.
If only 20% of the roads in a town handle 80% of the traffic, then that could be good for a maintenance crew who can concentrate mainly on the fewer roads; but it could be bad for commuters who take the busy roads. Such Pareto observations could lead to strategies; road crews could try to move passengers off of the busy roads, or commuters could move off on their own
5) Scoring May Be Inaccurate
The Pareto analysis works if you have been particularly careful with the scoring. If you make a mistake there, often things can take a turn for the worse. The businesses which fail to give proper scoring to every factor only get back incorrect results.
For instance, the shipping manager of a company happens to analyze The Pareto Principle. He wants to find out where most problems occur during the shipping process. Since the manager will focus primarily on his department, the score might show that the problem lies in the transportation section.
However, the real problem could be in packaging and preparing the product for shipping. The manager will end up focusing on the wrong issues. It will be a waste of resources as well as time.
The Pareto principle also does not consider time factors. It disregards time taken to find and recruit clients but sees only their monetary value.
6) Lack of Scientific Research in Sports Training
The 80/20 rule is not yet scientifically proven to be useful in sports training. More research is needed to test the controlled studies using athletic training.
Wrapping it up!
The Pareto Principle is not a method to eliminate every non-critical section of a situation.
It is a phenomenon that helps you focus on areas that have a more significant impact on your business. You can find the areas which create a maximum problem and resolve these issues to attain maximum profitability.
You can easily find out which areas of your business are not working to their fullest and thus gain access to simple problem-solving. You can focus your attention on the issues which need immediate attention and work to improve the overall performance of your company.
Most successful businesses in the world today have effectively used The Pareto Principle to their advantage.
Lastly, the Pareto Principle doesn’t mean that you should only do 80% of the needed work. 80% of the work indeed gets completed in the first 20% of the time.
For instance, lastly, don’t think the Pareto Principle means only do 80% of the work needed. It may be true that 80% of a bridge is built in the first 20% of the time, but you still need the rest of the bridge for it to work. It may be true that 80% of the Mona Lisa was painted in the first 20% of the time, but it wouldn’t be the masterpiece it is without all the details.
The Pareto Principle is an observation, not a law of nature.
When you are seeking top quality, you need all 100%. When you are trying to optimize your bang for the buck, focusing on the critical 20% is a time-saver. See what activities generate the most results and give them your appropriate attention.
Now, on the concluding note, we hope you would have understood the concepts of the Pareto Principle and its varieties of implementations. Are you still having any doubts about the Pareto Principle? Feel free to ask us in the comments below.