According to Wikipedia, Vilfredo Pareto was born during 1848 and was an Italian polymath. I know it sounds boring, but his observations are so important to business, finances, and virtually all aspects of life. Let me explain . . .
Background
Pareto had an interest in sociology, civil engineering, economics, political science and philosophy. One of his important contributions was the study of income distribution. He stated that the distributions of income and wealth are highly skewed with a few holding most of the wealth. He stated this in his textbook containing the Pareto Distribution of how wealth is distributed, which he believed was a constant “through any human society, in any age, or country”. His famous observation was that twenty percent of the population owned eighty percent of the property in Italy. This was later generalized by Joseph M. Juran into the Pareto Principle, also known as the 80-20 rule.
Application to Business
How does the Pareto Principle or 80-20 rule apply to business? The Pareto Principle states that 80% of outcomes are derived from 20% of the inputs. Examples include:
- 20% of your customers provide 80% of your sales
- 20% of your employees perform 80% of the work
- 20% of your marketing produces 80% of your leads
The simplest way to apply the Pareto Principle is to review all aspects of your business to determine which activities should be increased, which ones should be minimized, and which should be eliminated. It is the simplest, most important, but most difficult endeavor you will embark on for your business. You need to strip out virtually all emotion and rely on data and facts.
Conclusion
The Pareto Principle is an extremely valuable principle to apply to your business to obtain the best results. Start with the easiest items to change and as you see the results, it will help to motivate you to continue to make changes in the right direction.
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