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Pareto Principle : The 80-20 Rule

The Pareto Principle is also known as the law of the vital few and the principle of factor sparsity. The rule states that, for most phenomena 80% of the consequences arise from 20% of the causes. Vifredo Pareto was an Italian economist who formulated a mathematical equation to explain the unequal distribution of wealth. The principle was actually described by Dr. Joseph M. Juran in the late 1940s and he attributed it to Pareto because of the observation that 20% of the population owned 80% of the wealth of a country. This idea is most commonly applied to sales data, “20% of customers are responsible for 80% of profits” and so on…

The principle as stated by Pareto in 1895 is:
"In any series of elements to be controlled, a selected small fraction in terms of number of elements almost always accounts for a large fraction in terms of effect." But this principle has been applied in every field, from business to horse racing. In computer programming, the rule says that 80% of the problem can be solved by putting 20% of the effort needed to solve the whole problem.

In the business arena some questions are asked in order to obtain Pareto’s principle in action.

• Does 80% of revenue come from 20% of sales force?
• Is 80% of product sale accounted for by 20% of the products?
• Is 20% of a webpage alone viewed by 80% of the visitors?

One of the most useful tools using the Pareto Rule is Pareto Analysis. It allows you to identify those important few factors that determine the consequences of any decision. Here all the required data is collected and displayed in the form of a histogram. This histogram is known as the Pareto Chart. The histogram is plotted based on the importance given to each of the factors. These factors can be given a score from 1 to 10. Data is plotted in descending order of importance on the histogram.

In short, five steps to draw a Pareto distribution are:

1. Drawing a list of problems or items to be compared
2. Developing a standard measure to compare the items
3. Selecting a time frame within which to collect data
4. Tally the item based on frequency of occurrence
5. Plot them in descending order in a histogram

For example, in e-business, making “vital few” lists will definitely make them vital. The New York Times makes a bestseller list so as to increase the viewing. Amazon 100 has also appeared for the same purpose. Search Engine Optimization is also a method to reach the same goal. It works on the premise that 80% of the viewers see only 20% of the site.

Pareto’s principle is also a time management technique. The first step is to write down all the work you want done in a particular span of time. The next step is to prioritize them. 20% of the work is highly important and has a high payoff. 80% of the time should be organized in a manner that these 20% tasks are completed first. The rest of the 80% tasks can be accommodated in 20% time.

The 80-20 rule is a genius in itself because the number of uses to which it has been put.

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