What is the 'Pareto Principle'

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Pareto Principle is also known as The 80-20 rule, the law of the vital few.

 

The 80-20 rule was first introduced by Italian economist Vilfredo Pareto, who, in 1906, observed that 80% of Italy's land was controlled by 20% of its population. From there, it was developed by Joseph Juran, a 20th-century figure in the study of management techniques and principles. Jurin took the rule and applied it to a number of different facets of business and the economy. It is now used to describe almost any type of output in the real world.

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The 80-20 Rule in Business

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The 80-20 rule is a rule of thumb that states that 80% of outcomes can be attributed to 20% of all causes for a given event. In business, the 80-20 is often used to point out that 80% of a company's revenue is generated by 20% of its total customers. Therefore, the rule is used to help managers identify (ANALYZE) and determine which operating factors are most important (FOCUS) and should receive the most attention (OPTIMIZE), based on an efficient use of resources.

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Practical Application of the 80-20 Rule

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The 80-20 rule is most commonly used for analyzing sales and marketing. If a company can identify its highest-spending customers, it can effectively market to them in order to retain existing customers and acquire similar consumers. Therefore, companies should dissect their revenues and understand who makes up their top 20% of customers.

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From there, it's been found that the top 4% of a customer base accounts for 64% of total sales, meaning that the more granular a company can get in its analysis, the more accurate the understanding of its customers becomes. This then allows companies to launch targeted marketing campaigns aimed at resonating with the most impactful consumers.

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Pareto Principal 

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We named our agency "Pareto Principal" because we firmly believe that if we apply the Pareto 80-20 rule, we can help any business ANALYZE, FOCUS and OPTIMIZE their marketing efforts to increase revenue.