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What is the Pareto Principle?

what is the pareto principle

The Pareto principle is known as the 80/20 rule. It states that in any given scenario, 80% of the outcomes are the result of 20% of causes. The principal was named after Vilfredo Pareto, a professional economist from Italy, who observed that 20% of the people were responsible for 80% of the nation’s income. 

The Pareto principle has been used in a wide range of industries, from manufacturing, hospitality, health, software development, and marketing, to show that small things can have a big impact. This has allowed organizations to shift their efforts towards activities that truly matter to their customers and bottom line.

How the Pareto Principle (80/20 Rule) Can Be Used

Let’s look at how the Pareto principle can be used with some real-world examples. 

An example would be a marketing team that notices 80% of their engagement on Facebook comes from 20% of the things they post. This is valuable information for the team because they can analyze the top-performing and extract insights. 

From these insights, the marketing team can then tailor future posts to match the tone, style, format, and other common characteristics of the posts in the top 20%. As for the other 80%, the team can edit and repurpose these posts to match the characteristics of the 20% that got the most engagement.

The Pareto principle can also be seen in app development. A project manager can see that 20% of app development processes are responsible for 80% of the app’s features. The manager can then look into these processes to find out why they work so well and create guidelines and SOPs. These can be used in future software development projects to move things along.

In the above example, it could be that the other 80% of the app development processes are making app development unnecessarily complex. Therefore, they need to be streamlined or eliminated. Or it could be that these processes have problems that need to be identified and resolved. A good Six Sigma methodology the manager can employ to help with this is DMAIC.

In manufacturing, an organization might discover that 20% of their products are responsible for 80% of their revenue. This can give them a clear indication of which products to focus on. That way, they can channel more resources towards that 20% – away from the 80% – to grow their revenue.

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Limitations of the Pareto Principle

The key to using the Pareto principle is to not use it in situations where it doesn’t apply. It is an observation, not a law. Just because you noticed it in a majority of areas, it doesn’t mean that it will be observed everywhere. In some scenarios, it may be the case that 25% of results are produced by 75% of causes. 

However, the logic still applies: focus on what matters.

Conclusion

The Pareto principle helps organizations make more informed decisions. It causes a shift in focus, helping management zero in on what works to improve outcomes. While it doesn’t apply to every situation because it is not a law, in situations where it does apply, resources can be allocated in a smart way to improve the customer experience and earn the organization more revenue.

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