The Importance of the Pareto Principle in Business

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In the current hyper-competitive global economic landscape, businesses need to find any competitive advantage that they can to ensure not just short-term survival, but long-term growth, too.

Yet, while it may seem like the only viable course of action is to overhaul operations, it can often be the slightest of revisions or implementations that turn a somewhat sinking ship around. What's more, all it takes is a little bit of probing and a 19th-century economic model to produce such transformative results.

So, what is this model, and how can it apply to your company? To illustrate, we've broken down the impact and importance of the Pareto Principle in business.

What is the Pareto Principle? 

In 1896, an Italian engineer named Vilfredo Pareto pitched a mathematical probability model that suggested 80% of consequences arise from just 20% of the causes. Designed to identify imbalance between inputs and outputs, it became known as the 80/20 rule and, later, as the Pareto Principle.

Pareto, a keen economist, realised the concept by discovering that around 80% of the land in his native Italy was actually owned by just 20% of the population and, after further study, quickly learned that this was the case in many other countries. Pareto, therefore, concluded that many aspects of our existence are not distributed evenly. 

Since then, the Pareto Principle has found application in a whole host of fields – not least of which is business. For instance, a key benefit of incorporating the philosophy into your daily operations is that you can immediately identify what is working and what is not. Therefore, if 20% of your customers account for 80% of your sales, then it makes sense to concentrate your resources on these clients. 

At the same time, many argue that the Pareto rule is merely an observation rather than a fundamental law. You may have 20% of the workforce completing 80% of the work, but does this mean that the remaining 80% of your employees are non-productive or dispensable? 

When utilised sensibly, the Pareto Principle can add significant value to your company's growth and profits, so let's explore how it can be used positively. 

The Pareto Principle in Business 

When combing through your corporate data, you may find that, often, there are seemingly inconsequential events that account for most of your results. Perhaps a small number of products within your inventory are responsible for most of your orders. Or, you might learn that certain identifiable employees achieve far greater or poorer work outputs than their colleagues. 

The Pareto Principle can expand upon these seemingly inexplainable concepts in the following ways:

Productivity 

The Pareto model is not a one-size-fits-all approach to identifying what is wrong with your organisation, but it can be a highly useful tool for identifying productivity issues. For example, the 80/20 philosophy can provide answers in two key areas: maximum efficiency and unproductiveness.

Maximum Efficiency 

The Pareto Principle can encourage individual employees to prioritise their tasks better, so that they can manage their time more effectively and produce optimal results. In this case, an employee can concentrate on the imperative 20% that produces 80% of the results. By doing so, it enables employees to avoid wasting time on the trivial, and home in on the vital.

Unproductiveness

You can also take advantage of the idea to resolve perpetual unproductivity. For example, you, or one of your managers, can follow the trail to identify the 20% of causes that are leading to 80% of the unproductivity. With a little bit of probing, you may discover that, say, social media distractions or unskilled workers are hurting the firm's productivity objectives, and employ the appropriate tactics to reverse this trend. 

Marketing 

In business, entrepreneurs home in on their marketing efforts with the 80/20 rule, but how can this generate actionable insights and spur results? Start by: 

  • Finding out which customer group has spent the most amount of money on the largest amount of products in the recent past. 
  • Determine where 20% of these customers came from (it could be a search engine or a social media link). When you discover this crucial information, optimise your efforts to expand your research in this arena. 
  • According to marketing guru Neil Patel, it is then imperativeto conduct 'a demographic and psychographic study on your 20%' because 'the better you get to know them, the better you can target them.' 

You can then find even more customers that fit these characteristics, which can grow the 20%. 

Customer Service 

In today's global market, customer service has become a critical component of business. Whether you are selling apparel or technology, you are competing with hundreds of other companies all over the world, and an effective customer support structure can help you to stand out. So, how does the Pareto Principle apply in this arena? 

Let's argue that 80% of your customers' complaints are related to 20% of your goods or services. Logic would then dictate that you need to perform a thorough analysis and audit of your products or services that are causing the most amount of problems for your business. You can then rectify the situation and permanently resolve the surge in customer service issues regarding these items. 

Website Optimisation 

If you have an online presence, then you should be appraising your website analytics on a regular basis. If this isn't the case, then you should begin immediately, because you may be surprised by what you find. For one thing, you may discover that 80% of your traffic lands on 20% of your website pages.

Knowing that one-fifth of your pages attract the most eyeballs is important, as it allows you to know where you should be allocating your resources. It also allows you to see what kind of content is most attractive so that you can produce more of the same.

Products and Services 

The core purpose of analysing your business performance is simple: to see which of your products are selling, and which are not.

However, the Pareto Principle allows you to look a little deeper and consider the cost-effectiveness of your sales performance. For instance, the 80/20 rule might inform you that a fifth of your supplies is eating away at 80% of your budget.  

Indeed, your findings might not even need to apply to what you sell, but what you work with daily. Even just a little bit of investigation may help you to learn that 20% of your computer equipment or software is causing 80% of your office downtime, which could be affecting sales.

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It is a tight market out there, and unfortunately, things are unlikely to change in the foreseeable future - especially if you are a small business. You will inevitably need to execute every tactic and employ every measure to ensure that your enterprise is both equipped to handle present conditions, and be prepared for when the global economy returns to normalcy and the boom phase of the business cycle. By curing weaknesses and enhancing your strengths, your firm will be confident in taking on all challengers in the future, and the Pareto Principle can help you to achieve this endeavour in much greater depth.

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