Useful applications of the Pareto Principle in business strategy
For those of you who have yet to discover the Pareto Principle, or simply forgotten about it: the Pareto Principle states that 20% of inputs result in 80% of outputs. Now that’s out of the way, let’s continue with my debut article.
1. 20% of Employees create 80% of the value (But most functions are essential)
SALES! For most businesses would simply shutdown in weeks if sales and marketing departments ceased to exist. Sales departments are usually the lifeblood of an organisation as most revenues are generated from either marketing inquiries and/or sales contacts networking in multiple mediums i.e telemarketing, business meetings, sales presentations ect. Depending on the type of company Product staff, finance staff, service-delivery staff may also be part of the 80% of value generators but even in this scenario having work to do is crucial to being able to function and carry out their roles.
2. 20% of Sales Employees bring in 80% of Revenues
Within these sales/marketing/PR departments a few individuals usually take in the lions share of the revenue. This helps to explain why excellent sales professional are often among the highest earners in a company. Rightly so, in many cases.
3. 20% of code is vital for 80% of a typical piece of software
It is a well known fact in the software industry that a huge portion of code and programming is not often actually used, completely revised or even published in with many functions that will not even be utilised. This is a waste of all business participants time and the implementation of Agile practices and short time-frame iterations has proven to reduce the amount of time writing unnecessary code and hence made both developers and businesses more efficient as a direct result.
4. 20% of business purchases are worth 80% of the added business value
Alright so company cars and mobiles are functional purchases that to some extent can pay for themselves. However, taking your whole computing department on lash dinners on the business every month is not strictly affecting the bottom-line (yes there is the argument about the benefits of bonding, but there is still extensive research going on to test if modern luxury working benefits offered in the digital and related sectors really do contribute to increased productivity). Investing in latest technology and technology that can be used with clients and also promoted as part of the business often has a positive measurable result on profitability, resultant cash flow and perceived business value.
5. 20% of business customers are worth 80% of revenues
This is self-explanatory. Often marketing firms have flagship clients purchasing their turnkey solutions. These large firms can afford a lot of service and hence their percentage of the revenue is a large portion of a firms revenue as a result of their size, needs and purchasing power.
6. 20% of business customers get 80% of the attention (most likely due to the above)
Because of the much larger amounts spent by (usually) large clients it is then imperative that their projects and services are paid lots of attention to by the business. Consequently it is estimated that this 20% subset of clients receives a whopping 80% of their attention. A great example of this is the digital marketing industry where on average the 21% of the largest clients account for 83% of the service time.
7. 20% of online purchases are responsible for 80% of online revenues
This is a simple pattern to understand. Take for instance eBay, items available there range from millions of lower quality small items that are often quickly disposable to vehicles and high value art and collectors items, though the larger items are far less frequently purchased than smaller items the highest value 20% (calculated via median) of items are worth approximately 77.9% of eBay's retail online revenue.
8. 20% of effort results in 80% of business growth (exponential)
Just 20% of a business network and contacts will lead to 80% of the gains. Usually smaller businesses leverage partnerships with larger businesses which commonly are responsible for a large portion of the company’s growth. Hence the very large portion of growth that can often be afforded to just one-fifth of contacts or efforts.
9. 20% of a medium-to-large backlog is worth 80% of the logs total importance
Business Analysts and Agile Practitioners worldwide will be able to relate to this important reality. Quite simply, of the requirements and user stories generated and (un)ordered into a backlog only a few ones will be they key issues that need to be resolved or a couple will be crucial to 80% of the output. Lots of the time products and services contain several features that are merely bonuses to a product’s core functionality, often teams can inefficiently focus of small issues and forget to spent more time on key parts of a product.
10. 20% of marketing channels are responsible for 80% of ROI/Returns/Revenue
Larger corporations often enjoy taking advantage of the massive purchasing power they have due to their scale and feeding capital into a broad range of marketing techniques i.e print, digital, media, TV/radio advertising. However, on most business balance sheets it is clear that merely a few or even a single marketing stream is responsible for the bulk of revenue.
So remember the Pareto Principle next time you consult a business or if you’re already running a business. Bearing it in mind will allow you to question its validity, attack problems for various angles and help you to make sound and smart decisions for your/the business. Ultimately helping to increase revenue, productivity and everybody’s favourite metric: profit.