The Pareto Principle: Concept and Application in Practice

Motivation for life

Focus on the essentials, don’t waste time on tossing and turning, stop trying to solve all problems. This is the key to success in any sphere of human life and activity. This is taught by the Pareto Principle, developed in the late 19th century by the Italian sociologist and economist. It is actively used in management, economics, sales, personnel management and other areas, and is fully consistent with real statistics.

The Pareto Principle – What is it?

The essence of the law is based on the inevitability of imbalance. We are talking about large property, financial flows. You can’t put in a hundred percent effort and expect a similar return, that is, the ratio will never be 1/1. If we try to explain the Pareto principle without terms, but in simple words, it says that the greatest result is achieved through a minimum of effort.

This can easily be tested in practice. Most customer complaints about service in a store, for example, are caused by a few root problems. This means that there is no need to overhaul the entire work process. It’s enough to address the root causes. If you time the uninterrupted work each time on a timer and then add and subtract from the total time, the efficiency will not be 100% to 100%.

Working according to the Pareto principle
Working according to the Pareto principle

The principle calls for the conservation of resources and forces. This applies first and foremost to time. It is irretrievable and is wasted irretrievably. Spending six hours to sleep, eat, and bathe, and 18 hours to work is no way to get more out of it. Only part of the effort will bring results, and the rest will turn into fatigue and dissatisfaction. Understanding your maximum allows you to work more efficiently, have time to relax, have fun, and feel happy.

The rule of Pareto’s law

is an empirical theory, i.e., easily verifiable in practice. The Italian economist discovered the pattern that 80% of a country’s wealth belongs to 20% of the people. The statistic was confirmed not only by the example of other countries, but even by different time frames in the past.

The principle gained wide popularity thanks to business consultant J. Juran, who read the works of Wilfredo Pareto, and R. Koch, who described the principle in detail in a book. The rule is as follows: “80% of the results are achieved through 20% of the effort.” Most effort produces the least effect.

SMART targets

Distribution law

Theoretically, the principle may seem somewhat complicated and not comparable to reality, but the implications and conclusions drawn from it make it possible to quickly put it into practice:

  • To achieve most goals, a small expenditure is sufficient. The main thing is to determine the most effective and efficient approach, a tool.
  • Fidgeting and chaotic actions do not bring any results. Trying to get everywhere, you won’t get anywhere in time.
  • Even the most complex problem has a simple and quick solution, so there is no need to reinvent the wheel, it is enough to apply existing experience and practice.
  • There is no need to over-do a task if it does not require it. You should always be clear about what to do, and the solution will require the use of minimal resources.
  • The working optimum is 20%. The rest yields only a small and practically unperceivable result.

Applying the law in some areas gives a result of 10/90 or 30/70. It may seem that the theory does not work. If you put things, business, and sales in order, you get the values you are looking for, which are 20 and 80. This is a paradox, which reflects the very essence of the balance of everything that happens in the world.

Why do you need to know the Pareto Principle? The answer is simple, to competently manage any resource, and most importantly, time. Having managed to make minimum expenses, having received sufficient result, it is possible simply not to do other things, if they are not important.

Using Pareto’s Law

The cornerstone of the principle is the call to analyze actions, situations, problems, to remove all unnecessary things, to focus on the essentials. To better understand how to apply it in practice, we should look at examples in various fields.

The Pareto Principle in Sales

To increase sales, to minimize costs, you need to clearly understand that:

The Pareto Principle in Sales
The Pareto Principle in Sales
  • Most of the revenue comes from 20% of customers for a similar number of items. The rest of the visitors come just to look, and other items create the necessary assortment of variety that makes the store attractive. What should you do if it lags? Arrange promotions like “2 goods in 1 hand” and so on. Making promotional offers in personal sales, always focus on a few, and just include the rest in the brochure, price list.
  • Only 20% of employees’ labor time is spent on making and executing the purchase. In other words, out of 6 hours, excluding lunch, about 90 minutes are devoted to the actual work. The rest is talking, idle walks around the hall. If we talk about stores, this is common. The situation is completely different in trading companies whose turnover depends on the contracts they sign.
  • Of all the workers, only 20% are of real use to the company. What to do in such a case? Either optimize the labor process by expanding the activities and burdening such employees with responsibilities, or say goodbye to those who do not bring any benefit to the enterprise, and invest the money saved in the development of the business.

By conducting a thorough analysis, you can significantly reduce costs and raise sales.

Warning. The rule is not suitable for large-scale and complex projects. They consist of many tasks and subtasks, to which only responsible and qualified specialists are involved. Each step is prescribed and thought out in advance. Here, as a rule, there is nothing superfluous.

In Economics

Pareto’s law in economics

  • The ratio of the rich to the poor;
  • distribution of resources;
  • tax revenues.

This applies not only to the individual state, but also on a global scale. The number of rich people who own resources, businesses that pay the highest taxes is about 20%.

Pareto's law for economics
Pareto’s law for economics

Pareto Principle in Management

Similar to business, the problem in this field is the employees. Eighty percent of the work is done by only twenty percent of the employees. The problem is obvious. Most people just slack off. Some in moderation, others outright do nothing. Even large corporations should understand that external economic conditions are changeable, and any crisis can seriously shake the financial situation, which could have remained stable, if they wouldn’t pay those who don’t bring anything to the company in time.

Eisenhower Matrix

It is necessary to maintain a system of control over execution, introducing verification of reporting, tracking the tasks performed. An integral part of this process is to get rid of those who do not cope with their assigned duties. The main thing is that the system of identifying such employees should be as well-established as possible, allowing everything to be recorded in terms of legality (warnings, reprimands, and so on).

In management

For project managers, knowledge of Pareto’s law helps optimize teamwork on absolutely any project without delays, disruptions in deadlines, overwork, and decreased work efficiency:

  • Always prioritize the two most important and difficult tasks of the day;
  • Assign high performers to high-priority tasks and others to less important ones;
  • Monitor the progress of work during and at the end of the day.

To avoid having to interview employees, shared applications are used. Meetings are also effective, but only for business and short. A five-minute or one-hour meeting will bring similar results.

Pareto Principle - Efficiency
Pareto Principle – Efficiency

The Pareto Principle in other areas

The 80/20 rule applies to absolutely any field:

  • Personal Time Management. Of the tasks set for the day, only 20% should be of paramount importance. It is necessary to do them at the peak of your activity.
  • Family budget. Only one-fifth of spending goes on really important purchases. That means that 80% of money is spent on unnecessary purchases.
  • Self-development. An overwhelming number of books, courses, methods and hobbies are simply not necessary for a person. It is not necessary to try to read everything about the studied discipline, to take painting, singing, playing the piano or to get a bunch of certificates in English at the same time.

This allows you to plan your schedule as efficiently and effectively as possible.

Video about the Pareto Principle

 

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