Finsight Global

An analysis on why it could be an important tool in your goal setting exercise

What is Pareto Principle anyway?

Pareto Principle broadly states that 80% of the consequences come from 20% of the causes. In mid 1800’s Vilfredo Pareto an Italian engineer, economist, sociologist and philosopher observed that 80% of income in Italy was in the hands of 20% of the population. Pareto later carried out surveys in some other countries and found to his surprise that a similar distribution applied even there. This is how the principle came to be named after him. It is also known widely as the 80/20 rule.

Almost a century later Joseph Juran, engineer and management consultant, who is widely known as the father of quality management applied this principle to quality issues. Here too he found that the idea held water. 

Lately, we observe that this principle can be applied to almost all aspects of life.

For example:

1. 80% of customer complaints arise from 20% of products and services. 

2. 80% of profits are generated from 20% of products and services. 

3. 80% of revenues are generated from 20% of the sales force.

4. 80% of revenues are generated from 20% of the customers. 

5. 80% of all traffic accidents are caused by 20% of drivers on the road.

6. 80% of the problems users find in technology are due to 20% of the bugs found.

While this is a rule of thumb, in specific settings there could be a marginal skewing that we might observe. In your business maybe 30 % of the sales force brings 70% of your revenues or 15 % of the products bring in 85% of the volumes. The underlying principle however stays the same. Focus on that which matters more. Don’t sweat the small sweat.

Interestingly this is a rule that can sync perfectly well with all other walks of your life too. It can be comfortably stated that when it comes to productivity, 20% of your efforts generates 80% of your results. So when you identify the 20% and enhance the quality of that 20% effort, the results are exponential. 

Let us assume that over time you have acquired 100 clients for your business. On analysis you find that 80% of your business comes from 20 of them. It makes sense for you then to focus most of your energy on those 20 clients who are your golden geese. You maximize your productivity massively with this shift in gears. To word it differently ‘all are not equal’. From a productivity and profitability perspective, it is not sound business sense to treat all clients equally.

So, Keep the top 20% of the customers delighted! Pour out massive energy to the 20% of everything that is crucial. 

The Pareto Principle adds value to our lives by reminding us to focus our attention on the 20% things that matter more. This helps us greatly in planning our time and efforts on a day to day basis and even in our goal setting. When translated to daily life, 80/20 principle unfortunately indicates a propensity in all of us to just spend 20% of our time with influencers who help us with 80% of our life goals. This is relevant in the sphere of wealth creation, health and fitness, relationships or pure joie de vivre of life! 

Just imagine the difference we would make if we are able to put to use the Pareto Principle in our lives. We would:

• Work smarter and not harder. 

• Better our relationships

• Better our productivity

• Have better control over our personal and professional lives 

Next time someone tells you “There you are! with the grey shirt again…” tell them that it’s the Pareto Principle at play. 20% of your clothes are what your wear 80% of the time. Vilfredo Pareto would vigorously nod his head in agreement in his grey shirt!