Juran, the management guru, proposed the rule and additionally referred to as Pareto Rule or Principle after the Italian economist Vilfredo Pareto. In Italy Vilfredo Pareto recognized that 80% of the land had been actually owned by 20% of the people. Later Pareto formulated the rule as a result of learning about similar events.
Today, Pareto Principle is widely accepted and used in business because the same nature of occurrences and events studied by Pareto can be found everywhere. By recognizing this phenomenon managers in business can take advantage of this rule and focus on improving the vital few causes of the success of their companies.
For example, based on the pareto principle “80% of your current revenue is coming from 20% of your current customers”. Another pareto principle example from business is that “80% of your product defects come from 20% of the causes in your processes” or “80% of your sales are generated by 20% of your sales reps”.
The logic of Pareto applies almost everywhere. While the distribution is not going to be always exactly 80/20 you’ll definitely always have a similar distribution between causes and results in every situation in business.
What does the Pareto Principle tells us? The fact that you recognize this distribution method is a starting point for you to start your business analysis and evaluation for improvement by identifying the vital few causes of your current results regardless of whether the results are favorable or unfavorable for your business you’ll always start by identifying the vital few or critical causes in your organization.
Here are a few more Pareto Principle Examples:
- 80% of your new business development growth will come from 20% of your products and services
- 80% of your new product ideas will come from 20% of your employees
- 20% of your products generate 80% of the revenue
- 80% of advertising and marketing successes come from 20% of your advertising campaigns
- 80% of rewards come from 20% of the hard work
- 80% of deliveries use 20% of the stock
- 20% of your customers will give you the 80% of the complaints
- 20% of your employees will deliver the 80% of the results for your organizations
By looking at these examples you can think of similar situations in your company. Once you recognize the rule in your organization you can take advantage by learning more about the causes.
For example, once you identify the vital few in sales, you can learn more about the top 20% of your sales reps and identify ways how the rest of your sales people can improve by using the same approaches. In the case of unfavorable events by identifying the top 80% of your customer complaints you’ll learn that most complaints are about the 20% of your products and services and you can focus on fixing and improving them.
These pareto examples and approaches have been applied to many organizations and they always offer a great business insight. You can learn more about the actual occurrences in your business and by doing that you’’ be able to identify various alternatives for improving your business performances.