Pareto Analysis: Applying the 80/20 rule across your business

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From customers and complaints to product features and development needs, Pareto analysis is a useful approach to focus on the key issues of your business. This article explores how to use to 80/20 rule to help with prioritization at your business.

What is Pareto Principle and the 80/20 rule

The Pareto Principle, or the 80/20 rule, recognizes that across many situations, 80% of the opportunities come from addressing 20% of the problems. That is, not all problems are created equally – addressing the key ones will give the majority of the benefit. 

The principle itself can be extended across different areas, and hold true within the business setting. There are many situations where concentrating on the most important parts of your business will give the vast majority of the benefit. It helps reinforce that rather than distributing attention equally, the biggest reward is often attained from concentrating on the most important areas (and potentially even going as far as to ignore less important ones that would only have a negligible impact on the business). 

While it is not a ‘law’ in the sense that it does not always hold (there are clearly settings where the top 20% of customers clearly don’t make up 80% of the revenue – for example, if everyone is paying the same subscription fee), by and large, the underlying principle holds sufficiently well that it across many situations it is a useful rough guide to help illustrate the need for prioritization. 

Applying the 80/20 rule

Some possible areas where applying the Pareto 80/20 rule can yield significant organizational benefits include:

Customers

It is common in businesses to have 80% of all revenues of profits from 20% of customers. A small number of core customers can dominate sales, with a long tail of smaller customers each representing increasingly negligible volumes. Potentially it is a national distributor or a key online retailer – such firms are likely to have a significantly greater impact on your firm than small individual purchases. 

While there may be strategic reasons for serving these smaller customers (e.g., to avoid a new competitor entering to sell to these customers), you also need to make sure that you are not dedicating disproportional energy and time to these smaller customers. Recognize that your key customers may be as valuable as the bottom thousands, and ensure that you are prioritizing your attention accordingly. 

Bug reports

Another key area where the Pareto Principle holds well is bug reports. There is likely a small number of software bugs that impact a large number of users, while a large number of bug reports that only have a very narrow impact – potentially only impacting a particular set-up or obscure situation.

Prioritization can be key to addressing the most important bug reports. Concentrating effort on the most important ones will likely have a much greater impact than looking to ‘prioritize everything’ and in turn delay the key improvements due to time spent on much less impactful areas.

Product features

Another area where the Pareto 80/20 rule can be applied is when considering product features. It is likely that there are a small number of improvement that can have a significant impact on customers – while a large number of possible refinements that can be made where the impact will be minimal. Clearly looking to prioritize the different areas that you need to work on can help ensure that the 20% of features that will have the greatest impact actually are delivered upon, and not held up by the much larger number of possible areas that could be worked on. 

Importance of different projects

A final area where the 80/20 rule can yield organizational improvements is considering the number of projects that a firm is likely working on. It is not uncommon for there to be hundreds of small projects in large organizations – many of which unlikely to have a substantial impact on the organization (if they ever actually get launched), while each a potential distraction for management. Some projects there may not even be a clear rationale for why the company is working in that area – potentially it was a pet-project of a manager not longer at the firm, but it took on a life of its own, despite not being a strategic focus. 

Systematically analyzing each of the projects – identifying those that are likely to have a key impact on the firm, and those that are not strategic priorities – can help in the re-allocation of resources. Concentrating effort on a limited number of the most strategically important projects is likely to be a much better use of organizational resources than to try and do a lot of different things at once (each with comparably less effort). 

Adopting a 80/20 mindset

Developing an 80/20 mindset is all about trying to do more with less. To focus attention on the key area – because they will have the most impact on the firm – and to spend less time on the areas that will only have a very minimal impact.

While prioritization is never easy – and may mean tough decisions – recognizing that you will likely be making prioritizations anyway can help. If you are focused on ‘everything’, you likely won’t be prioritizing anything. You may succeed in the easier (and likely less important) areas, but key strategic parts may end up getting much less attention than they deserve (or competitors are allocating to them). 

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