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The Pareto Principle

The Pareto Principle

The Pareto Principle, also known as the 80/20 rule implies that in any given situation, 20% of inputs/activities are responsible for 80% of outcomes/results. For instance, 80% of the world’s wealth is held by 20% of people.

In business, the 80/20 rule is used to indicate that 80% of a company’s gross revenue is generated by 20% of its total customer base. With this viewpoint in mind, business owners should place greater efforts to identify and allocate most of their attention to their 20% most valuable customers. For the remaining 80% of the company’s customers base, perhaps work could be automated/outsourced as much as possible. With this approach, the efficient use of company resources and time is maximised.

To help illustrate this principle further, other examples of the 80/20 rule are as follows:

  • 80% of company sales are derived from 20% of its customers.
  • 20% of company employees may be accountable for 80% of the company’s output.
  • 80% of company complaints are from 20% of its customers.
  • 20% of company employees make up 80% of reported sick days.

The point is to apply the Pareto Principle or 80/20 rule across all areas of life. With this approach, you’ll be able to identify what is important and increase the level of efficiency of what is being sought out to be achieved. However, it is not an absolute principle; so use it liberally.

 

Sources of Information:

  1. https://www.thebalance.com/pareto-s-principle-the-80-20-rule-2275148
  2. http://www.investopedia.com/terms/1/80-20-rule.asp
  3. http://www.investopedia.com/terms/p/paretoprinciple.asp
  4. https://www.forbes.com/sites/kevinkruse/2016/03/07/80-20-rule/#208c06233814

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