In 1897, an Italian named Vilfredo Pareto began studying patterns of wealth and income in 19th century England. Pareto attempted to mathematically define the distribution of wealth and discovered that it was very unequal, with the minority having most of the wealth (sound familiar?). Ever since, this rule has been extensively used by mathematicians and economists to analyze similar scenarios.
The 80/20 Rule — On an average, 20% of something is responsible for 80% of the results.
Role of 80/20 Rule in Business Strategy
It is critical for any business manager to understand which,
- 20% of products account for 80% of revenues
- 20% of employee time accounts for 80% of business productivity
- minority of employees create disproportionate business value
The 80/20 rule works well with products and revenues, but can just as easily be applied to products and profits.
Internet revolution has caused the Pareto distribution curve to be dramatically steeper with online products delivering over 98% of sales!
In Management, the 80/20 Rule can be applied to almost anything:
- 80% of your time should be focused on 20% of the tasks that really matters
- 80% of your problems will come from 20% of your staff
- 80% of your sales will come from 20% of your sales staff
- 80% of your sales will come from 20% of your clients
- 80% of your warehouse space is utilized by 20% of your stock
- 80% of your stock comes from 20% of your suppliers
- and so on…
Implications for Business Managers:
- If you are providing a product, what % of goods are returned and why?
- Who are your most profitable customers, and how are you treating them?
- Which of your marketing efforts yield the highest ROI?
Adapted from Chip Evans‘ article The 80/20 Rule.