How To Effectively Use The Pareto Principle And What Is The 80-20 Rule

Whether you’re just starting out or have been a Business Analyst for decades, you’ve probably heard of the 80-20 rule or the Pareto Principle. It’s a jack-of-all-trades principle that can work in almost every business situation – and even in personal scenarios. Thousands of people around the world advocate for the effectiveness of this principle. 

However, before getting into how you can use the Pareto Principle, it’s essential to understand what it is and why this basic principle is so important. Here’s everything that you need to know about the Pareto Principle. 

The Origin of the Pareto Principle

In 1985, Italian economist Vilfredo Pareto noticed that 80% of the land was in the hands of only 20% of the population. The discovery led to Pareto concluding that this principle could apply to all economic activity. 

After Pareto’s initial discovery, other significant researchers found this concept applicable in a variety of different fields. All those additional discoveries also contributed to the more formal definition of the Pareto Principle that we know today.

What is the Pareto Principle?

A formal definition of the Pareto Principle is that 80% of the outcomes (or output) result from 20% of all causes (or inputs) for any particular event. In business, the 80-20 rule’s primary goal is to help identify which inputs are the most productive and prioritize them, or use them as examples of how to optimize other inputs. 

How To Apply  the 80-20 Rule

Now that you have a basic understanding of the Pareto Principle, let’s move on to how to apply the rule in a business setting. Business Analysts use the Pareto Principle to identify any issues that cause the most significant problems within their respective departments or organization. 

Here are all the different ways that Business Analysts can apply the Pareto Principle in their organization:

Applying the 80-20 Rule to Your Products 

One of the main ways to use the Pareto Principle is by identifying which 20% of the products are responsible for 80% of the sales or profits. Business Analysts can use these principles to focus their efforts on these products so that they can maximize earnings. Take a look at your products’ sales and identify which ones contribute the most considerable proportion of your revenue. 

But be careful: one myth about the 80-20 principle is that it has to be precisely 80-20! The main principle is that a small number of resources contribute to the maximum output. It doesn’t have to equate to an exact 80-20 ratio. 

Applying the 80-20 Rule to Your Customer Segments

Business Analysts can use the 80-20 principle to identify which 20% of buyers are responsible for 80% of the recurring purchases. That can allow them to focus on the likes and dislikes of these customers to encourage even more business from them. 

Alternatively, Business Analysts can identify which 20% of the customers submit 80% of the complaints and issues. After identifying those, they can either find ways to solve the problems or eliminate the customers altogether. 

Applying the 80-20 Rule to Your Employees

Business Analysts can use the Pareto Principle within their own company to identify which 20% of the employees drive 80% of the revenue. It can help you identify the key contributors to an organization and reward them accordingly. 

It also works the other way around. Analysts can use the principle to establish which 20% of the employees are causing 80% of the issues. They can identify the issues and address those employees before they create any future conflicts. 

By maximizing the potential of your employees, you can help the business grow substantially!

Applying the 80-20 Rule to any Business Situation 

The versatility of the Pareto Principle is such that it can apply to almost any business situation. Take marketing efforts, for example. Modern businesses make use of all kinds of marketing channels to get the word around about their products/services to current and potential customers. They engage in traditional marketing, referral marketing, and social media marketing, to give a few examples. 

By applying the 80-20 rule, Business Analysts can help identify which marketing channels help generate the maximum number of leads. That can indicate where you should direct your marketing efforts and what channels you should avoid using.

What To Avoid While Using The Pareto Principle?

When you’re using the Pareto Principle, there are several factors that you need to keep in mind. While it’s generally applicable to most business situations, the Pareto Principle isn’t set in stone. If you’re going to spend time finding exact 80-20 situations, you will likely find yourself frustrated. The rule of thumb to keep in mind is that a small number of inputs will contribute to the most significant output. So don’t go looking for exact 80-20 ratios. 

Another important consideration when applying the 80-20 principle is your approach. Misinterpretation of  the Pareto Principle could cause potential issues. When applying this method of analysis to employees, the Pareto Principle suggests that 20% of the employees generate 80% of the revenue. 

That might lead to Business Analysts prioritizing 20% of the employees and focusing solely on them. However, a potentially more effective plan would be to determine what makes 20% of your employees rockstars and then passing those techniques or knowledge on to the rest of the employees to help them reach greater potential. 

It’s always important to keep all things in perspective when making business decisions!

Why Is The Pareto Principle Important?

One of the main reasons why the Pareto Principle is so important is that it gives Business Analysts a straightforward optimization pathway. Regardless of where you apply the Pareto Principle, it allows you to identify what are the most important inputs. Prioritizing these inputs enables organizations to maximize their output. 

It can help Business Analysts become more productive by prioritizing the tasks that help generate the most revenue. The versatility of the principle ensures that it’s applicable in all business situations. It’s a key analysis tool that can apply to any decision-making situation.

Some Final Thoughts

The Pareto Principle is one of the best-kept secrets in the business world. It’s incredibly effective and can help Business Analysts quickly identify how to optimize every aspect of their operation. 

The Pareto Principle is an essential concept to understand and apply when working as a Business Analyst. If you know how to effectively use it, you can become an indispensable asset to your team.

Written by Jeremy Aschenbrenner, The BA Guide

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