Pareto Principle-80/20 Rule

Flow of Article

1. Definition of Pareto Principle

2. Real life examples

3. Visual Representation in form of Chart

4. Case Study Application

What is Pareto Principle?

Pareto Principle or the commonly known 80/20 rule says that 80% of results come from just 20% of activities. In other words, the majority-80% of impact is created by just-20% of work. This 80/20 rule or the Pareto Principle is widely applicable. Some examples in real life where Pareto Principle applies are :

Some examples to which you would be able to relate to in real life.

-80% of profit comes from just 20% of customers and 80% of the complaints are received come from 20% of the customers

- 20% of a company’s customers are responsible for 80% of the sales

-80% results are derived from 20% of Employees

-20% of your holdings(portfolio) brings in 80% of incomes

-The richest 20% of the humans have 80% of worlds income

-80% of work is completed by 20% of your team

Pareto Principle Visual Chart

What is given below in the chart is an actual example of Pareto Principle.

So, this chart contains data for Net Profit of top 100 Companies (Source- Money Control)

It’s clearly visible that the major bulk (70–80%) of profits of the total profits of all these 100 companies is generated by a small percent (20–25) of companies. And this is what the 80/20 Rule or Pareto Principle says, that “80% of the sales is generated by 20% of the clients” or, as here “80% of the profit is generated by 20% of the companies”

Application of Pareto Principle in Case Studies.

Steps to do for Pareto Analysis

(Example- You are a consultant, and you have been called by Amazon to find the reason for their declining sales.)

1. Identify all the activities.

This step requires you to identify and list down all the activities and tasks that are involved in a process/problem.

Here, you will list down all products/services that amazon sells.

These could be as follows-

2. Assign numbers — Score

Once you have identified the activities/tasks that build up the process, then you have to give numbers to all the activities and arrange them.

Here, I’ll try to find the amount of revenue being individually generated from all the streams and then arrange them.

3. Work on Solution

Now, you would know what is important for you to look on and what not. The Pareto principle would not tell you what could be the solution however, it will help you identify the area of problem or the area where you need to focus, and then you could develop a solution for the same.

Here, it’s clear that from all the revenue streams of Amazon, Retail Products and Retail 3rd Party sellers (20%) bring the majority (80%+) revenue. So, since the revenues are declining, your first aim should be compare revenue of these 2 streams with historical data and then go for further analysis.