Results tagged “pareto”

The Pareto principle (also known as the 80-20 rule, the law of the vital few and the principle of factor sparsity) states that for many phenomena, 80% of the consequences stem from 20% of the causes.

The Pareto principle was named after the Italian economist Vilfredo Pareto, who observed that 80% of income in Italy was received by 20% of the Italian population, but the same principle can be found in many other situations.

In most businesses, 20% of the customers account for 80% of the sales. And technical departments know that 80% of the problems are caused by only 20% of the clients. This is very interesting information for managers, who can use these numbers to steer their sales and support departments.

But how can we correlate the Pareto numbers for these two departments? Are the 20% that purchase the most the same customers that use most of your organization's resources? Well, experience tells us that this is not the case: there usually are customers buying for huge amounts without ever needing the support department. The two Pareto principle are not correlated, so if we only look at the small group of customers responsible for 80% of the sales, you will find once again that 20% of that group is using 80% of the resources.