Pareto Principle (80/20 rule)

We’ve heard it many times over. 80 percent of business comes from 20 percent of customers. Where did it come from? The short answer is Italy. It’s not just the land of vespas, pizzerias and jeans (coincidentally these were also invented in Italy). It originated from Vilfredo Pareto back in 1896 when he wrote his paper “Cours d'économie politique” or “Causes behind the Political Economy”. When developing his paper he drew from his observations that 20% of pea pods produced 80% of peas and he noticed this occurring in other areas of life and people. He observed that over 80% of wealth owned in Milan was held by 20% of its citizens1.

This recurring theme of 80/20 then came to the attention of management consultant Joseph M. Juran who, the 1940s, coined the phrase “Pareto Principle” and recognised that, from Vilfredo, there were the “vital few and the trivial many”2. The general rule of thumb of 80/20 was then applied to business, life, and just about everything else in between.

How does the 80/20 rule apply?

The rule occurs when 80% of an entity or happening is governed by 20% of another. That’s pretty much it in a nutshell. To put it into perspective, let’s look at some examples that we know happen our business lives everyday.

Customer complaints. They often originate from a small section of sometimes persistent customers. That means the majority of complaints are likely to come from a minority of our total customer base3. If we tallied up how many complaints versus how many customers we have, it may come to no surprise that the ratio roughly falls inside 80:20.

The same applies to repeat customers. They account for a high level of income to a business. However they don’t make up the majority of customer transactions. It’s therefore highly plausible that about 20% of a customer base will produce 80% of sales4. This rule can be used across many parts of a business, as author Perry Marshall explains in his book 80/20 Sales and Marketing5. He suggests business leaders to concentrate their efforts on those high value 20% repeat customers. Makes sense. And dollars.

Does it apply to sport? Absolutely. With athletes already in the same range of peak physical fitness 80% of the game (vast majority) shifts to being a mental game6. A large amount of time is spent on practising many strategies needed to win a game. Along with a high level of determination, focus and “never quit” attitude it places elite teams at the top of the NBA ladder. The rest of the time, a these teams spend keeping in peak physical condition and capitalising on natural physical ability (20%).

Making the most out Pareto’s Principle

In other applications of business, such as “ABCD Clients”, we will use the knowledge of the 80/20 rule to focus on the areas of business that matter the most. Harnessing Vilfredo Pareto's principle of identifying where energy is spent and applying it a business effectively, paves the way for a bigger and better future.

Imagine having more revenue from high value customers? How about knowing how to handle “problem” staff where they aren’t taking up a huge amount of your time? The 80/20 rule can help you identify the areas of who, what and where the greatest contributions to your business sit.

And that’s what’s really at the heart of the Pareto Principle - identifying value in people, time, money and effort.

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