Pareto Principle Definition
The Pareto Principle, also known as the 80/20 rule, is a business and investing guideline that states that 80% of outcomes (revenue, profits, etc.) come from 20% of inputs (customers, employees, products, etc.). In other words, a small number of items or people are responsible for the majority of results.
This principle is named after Italian economist Vilfredo Pareto, who observed in the early 1900s that 80% of the land in Italy was owned by 20% of the population. He also found that 80% of peas in his garden came from 20% of the pods.
Pareto’s insight has since been applied to many different areas, including business and investing. For example, it’s often said that 80% of a company’s sales come from 20% of its customers.
The Pareto Principle can be a useful tool for investors and businesses alike. It can help identify areas of opportunity and focus resources where they’re most likely to generate the greatest results.
At the same time, it’s important to remember that the 80/20 rule is just a guideline and not a hard-and-fast rule. There will always be exceptions to any generalization.
The Pareto Principle is just one tool in the investor’s toolbox. Used correctly, it can be a helpful way to achieve success.
Pareto Principle Q&A
How do you use the Pareto Principle?
Around 20% of inputs to a system produce around 80% of the effects, according to the Pareto Principle. Sales top clients, for example, generate the most revenue, while your most productive 20 percent of the day accounts for 80 percent of your total work output.
Why is the Pareto analysis used?
A Pareto Analysis is a simple decision-making method that allows you to evaluate and prioritize different issues or activities by calculating the value of each one.
What is a Pareto line?
A Pareto chart is a type of chart that uses both bars and a line graph to show individual values in descending order, with the cumulative total represented by the line.