What Is the Pareto Principle? The 80/20 Rule, Business Uses, and Examples
"80% of sales come from 20% of customers"—have you ever heard a rule of thumb like this? This is the idea expressed by the "Pareto principle," the so-called 80/20 rule. It is widely used in business as a hint for decision-making.
This article explains the meaning and origin of the Pareto principle, what "80/20" really signifies, concrete uses and examples in business, and points to keep in mind when applying it, in a way that even first-timers can understand.
The Pareto principle is an empirical rule that most of the overall results (about 80%) are produced by a small portion of the elements (about 20%). It is also called the "80/20 rule" or the "2:8 rule."
It originally derives from the Italian economist Vilfredo Pareto, who at the end of the 19th century discovered an imbalance in income distribution: that about 80% of a nation's wealth was concentrated in about 20% of its people. Later, the management consultant Joseph M. Juran applied this to quality control and popularized it as the idea of the "vital few," and it came to be known as a principle that applies across business in general.
The point is that this is not a strict formula or a law of physics, but an empirical rule expressing the tendency, observed across many fields, that "there is an imbalance in the relationship between results and their causes."
The first thing to grasp about the figure "80/20" is that its essence lies not in the "accuracy of the ratio" but in the fact that "there is an imbalance" itself. To deepen understanding, let's organize it from three perspectives.
In other words, what the Pareto principle teaches is the idea that "it is efficient to identify the 'vital few' that strongly drive results and concentrate resources there." Conversely, even if you pour the same effort into the 'trivial many' whose contribution to results is small, the return you get is limited.
The Pareto principle can be applied to various business situations. Let's look at some representative examples.
These are only typical examples, and your own data will not necessarily fall into this ratio. What matters is verifying with actual numbers "what constitutes the 'important 20%' in your own case."
To make use of the Pareto principle in practice, think in terms of "find the important 20% and concentrate on it." Let's organize the concrete uses by situation.
By identifying the top 20% of valued customers who contribute heavily to sales and concentrating thorough follow-up and repeat-purchase measures on that segment, you can grow sales efficiently. Rather than distributing limited sales resources evenly across all customers, this helps you make the call to focus on the customers with high contribution.
Identify the flagship products that make up the bulk of sales, and prioritize their procurement, inventory, and promotion. Combined with the ABC analysis described below, it becomes easier to decide "which products to put effort into and which to scale back."
When you tally the causes of complaints and defects, it is often the case that most of them are concentrated in a small number of causes. By prioritizing the causes with the highest counts, you can improve the bulk of the whole with little effort. In daily work too, you can apply the idea of identifying the important tasks that directly drive results and spending your time there.
A representative method for putting the Pareto principle into practice is "ABC analysis." This is a method of arranging items such as products or customers in order of importance (sales or contribution) and classifying them into three ranks—A, B, and C—according to their cumulative composition ratio.
For example, you might split the top group that makes up the majority of sales as A, the next as B, and the many low-contribution items as C, and allocate resources intensively to rank A. This is exactly putting the thinking of the Pareto principle—finding and concentrating on the "vital few (20%)"—into practice. For product analysis, a Pareto chart (a graph combining bars with a cumulative-composition-ratio line) is often used, letting you visually grasp where the "vital few" ends.
It is a handy principle, but if you misuse it, you will misjudge. Keep the following points in mind.
The Pareto principle is fundamentally used as a "hint for resource allocation." Rather than stopping your thinking by forcing things into the rule, it is important to interpret it flexibly to fit your own situation.
The Pareto principle (the 80/20 rule) is an empirical rule that about 80% of the overall results are produced by about 20% of the elements. It derives from the economist Pareto's discovery about income distribution, and its essence lies in the point that "results are skewed, and it is efficient to identify and concentrate on the vital few."
Its range of application is broad—sales and customers/products, complaint handling, process improvement—and combined with ABC analysis or Pareto charts it can be put into practice. However, rather than deciding "it must be 80/20," account for the remaining 80% and the existence of the long tail, and find your "important 20%" based on your own actual data—that is the way to use it that leads to results.
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