5 objectives of a successful application of Pareto 80-20 to business
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!
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