The Pareto Principle
What does it mean?
The Pareto principle states that 80% of the consequences stem from 20% of the causes. The most common application of that I have encountered is that 80% of revenues, profits or sales come from the top 20% of customers. As a rough rule of thumb it has some value. But as is so often the case in business the devil is in the detail. I have worked with businesses that have a more evenly spread sales to customer profile, and those that have a more extreme polarisation.
In my opinion it is important to observe the tool and be alert to its implications in the business world, but not to live or die by it. For example a business where 90% of the profit sits in 10% or less of the client base is obviously at a greater risk than one that has 60% of its profit coming from 40% of its customers. Does the company with the more even profile really need to get closer to the 80/20 rule? Almost certainly not.
The point is Pareto’s principle can teach us quite a few things if we use it to ask the right questions.
If only 20% of our sales activity generates 80% of our sales – maybe we should do more of the 20% and less of the ineffective 80%? What can we do to make the 80% more fruitful?
If we get the majority of our profit from a minority sub set of our clients, maybe we need to target businesses like them as a priority? Why are they our top customer? Why does it work for them?
What would happen if we stopped doing 80% of our current, less productive activity? Would reduction in costs and profit even themselves out? Are we focussing on the right things? Using the 80/20 rule as a thought tool to analyse activity, problems or business issues makes sense. Being aware of how and where it manifests itself in the business sensible process. However, being obsessed with â€œadheringâ€ to it is probably an unhealthy pass time. Trying to become the exception to it in areas of effectiveness, efficiency and customer satisfaction, getting more than 20% working well? That would seem a worthwhile activity to engage in, in my opinion.
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