If there’s one management principle every entrepreneur needs to focus on and follow in life, it is definitely the Pareto principle. Coined by Vilfredo Pareto, an Italian economist-sociologist, Professor of Political Economy at Lausanne, the principle is often referred to as the “80:20 effect”. It is also popularly known by the following names- The Pareto Law, the 80-20 rule, the principle of imbalance, the rule of the vital few and the principle of least effort.
It is a common management principle which states 80% of your business comes from 2% of your customers.
In case of business, this law can be used in many ways:
• 80% of problems can be attributed to 20% of causes
• 80% of a company’s profits come from 20% of its customers
• 80% of a company’s complaints come from 20% of its customers
• 80% of a company’s profits come from 20% of the time its staff spent
• 80% of a company’s sales come from 20% of its products
• 80% of a company’s sales are made by 20% of its sales staff
Applying the principle to real life:
This principle tells us the importance of the 20% which is what we need to focus on for the best results. While scheduling the tasks for the day, it is important to make sure that we stress and lay importance on this 20%. Even if some things have to be skipped, make sure the tasks are not the ones that fall under this 20%.
Similarly, when it comes to the employees, it is 20% of the employees who bring 80% of the business, so, it makes more sense to provide them with the required attention and resources which will help them become better. The superstar line of employees can also be tempted with rewards so that they work harder and reap profits for the company. However, this can get tricky as you’d be ignoring the mass and concentrating on only the crème de la crème of the company.
This principle can also be successfully used in the process of the initial planning where a lot of factors need to weighed carefully. It can also help with judgments while troubleshooting, problem analysis, and decision-making.