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| By Arthur W. Hafner, Ph.D. Vilfredo Pareto (1848-1923) was an Italian economist who, in 1906,observed that twenty percent of the Italian people owned eighty percent of their country's accumulated wealth. Over time and through application in a variety of environments, this analytic has come to be called Pareto's Principle, the 80-20 Rule, and the "Vital Few and Trivial Many Rule." Called by whatever name, this mix of 80%-20% reminds us that the relationship between input and output is not balanced. In a management context, this rule of thumb is a useful heuristic that applies when there is a question of effectiveness versus diminishing returns on effort, expense, or time. The Rule and Its Corollary Pareto's rule states that a small number of causes is responsible for a large percentage of the effect, in a ratio of about 20:80. Expressed in a management context, 20% of a person's effort generates 80% of the person's results. The corollary to this is that 20% of one's results absorb 80% of one's resources or efforts. For the effective use of resources, the manager's challenge is to distinguish the right 20% from the trivial many. Practical Applications Some examples about the allocation of time, effort, and resources are the following: Costs: To reduce costs, identify which 20% are using 80% of the resources. If members of this segment are not top profit generators, consider charging them for the resources they consume or shift services away from this sector. Personal Productivity: To maximize personal productivity, realize that 80% of one's time is spent on the trivial many activities. Analyze and identify which activities produce the most value to your company and then shift your focus so that you concentrate on the vital few (20%). What do you do with those that are left over? Either delegate them or discontinue doing them. Product Mix: Marketers and advertisers engage in market segmentation by identifying groups of people/organization with shared characteristics and then aggregate these groups into larger market segments. This segmentation may be behavioristic, demographic, geographic, or psychographic. The rule predicts that 80% of the profits are derived from 20% of the segments. If costs are allocated to segments and the segments are then rank-ordered by profit, overall profits will increase if the less profitable segments are discontinued, sold, or traded. Profits: To increase profits, focus attention on the vital few (top 20%) by first identifying and ranking customers in order of profits and then focusing sales activities on them. The 80-20 Rule predicts that 20% of the customers generate 80% of the revenues, and 20% yield 80% of the profits, but these two groups are not necessarily the same 20%. |
| More Practical 80/20 Applications 80% of your sales come from 20% of your products or services. |