Pareto's 80-20 Rule

Use the 80 20 Rule to Increase Business Profits

A 80/20 rule implies that 80% of the benefit comes from 20% of the causes. Similarly, 20% of a business causes 80% of the delay, defects and lost profits. This concept is also referred to as the Pareto Principle. The goal of any business is to focus on increasing the 20% of customers and business activities that drive revenue and focus on reducing the 20% of the business that cause unnecessary costs.

The 80/20 rule and the pareto principle are useful on both the sales and the cost side of business performance. Businesses can increase sales to their best clients and reduce the costs. Joseph Juran found that most businesses waste 25-40% of their budget finding and fixing problems. Pareto analysis using the 80/20 rule is an excellent way to reduce costs.

While many business activities have a linear (i.e., 1-2-3) progression; the 80-20 Rule is a power law. It follows an exponential (i.e., 2-4-16-64) progression. If you apply the 80-20 rule to itself, you'll find that as little as 4% of the business produces over 50% (64% to be exact) of the delay, defects and lost profit. Jay Arthur calls this the 4-50 rule.

The 80/20 Rule can be demonstrated using a Pareto chart.

8020 rule applied to itself is the 4-50 Rule (Arthur's Extension to Pareto's 80/20 Rule

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