Many business analysts and managers are aware of the Pareto principle or the 80-20 rule in business. They may even have applied it certain contexts, mostly likely to sort data by Pareto ranking. Our regular readers will recall that the 80-20 refers to a distribution ratio between profits on the one hand and products/customers on the other hand: for example, 80% of the business' profits are attributed to 20% of the company's products.
A structured application of "Pareto 80-20" analytics will allow businesses to hone in on the most profitable activities with a laser sharp focus. The biggest advantage, however of the Pareto 80-20 is in guiding business strategy. After you understand the analytics and the implementation procedures behind the Pareto 80-20 process, you should be able to achieve at a minimum the following objectives:
- Develop a reliable ranking of customers by their profitability
- Develop a reliable ranking of products by their profitability
- Understand what is a healthy distribution ratio between customers and their profitability, same for products-profitability
- Understand if achieving this (healthy distribution ratio) is a realistic target for your business
- Learn how to maintain this optimum distribution ratio for the company
There are nuanced differences between applying the Pareto 80-20 for products and customers, but the broad methodology is of course very similar. We have described in this blog how to apply the Pareto 80-20 rule for products and how to apply the Pareto 80-20 for customers.
There are some common confusions to overcome when you are applying the Pareto 80-20. Assuming that the value of this analytics is clear to you, you may yet run into some common objections to the Pareto 80-20 and it is helpful to be aware of these as an analyst. Finally, there may even be some "philosophical" issues about the Pareto 80-20: is it a solid mathematically structured principle or a simply a good thumb rule?
Now that you have armed yourself with sufficient know-how behind this valuable analytics methodology, a few case studies and a good tutorial should seal the deal!
Want to master applying Pareto principle in your business? Get our interactive learning module now!
Not ready to buy? Download our free whitepaper on the Pareto 80-20 rule in business below.