Pareto Principle (80–20 Rule)
Pareto principle which is also known as the 80 to 20 rule was created by Vilfredo Pareto who was an Italian economist in the year 1906. This formula was created to explain the unequal distribution of wealth assuming that 20 percent of the people of the country hold 80 percent of the total wealth. At the end of the year 1940, DR. Joseph M. Juran attributed this rule to Pareto calling it the Pareto Principle.
Pareto Principle describes the relationship between inputs and outputs. The principle specifies that 20 percent of the input is responsible for 80 percent of the output. In other words, it can be said that 80 percent of the results depend on 20 percent of the causes.
The Pareto Principle also states that there is an unequal relation between inputs and outputs. For example, 80 percent of the profit of the firm will be the result of the 20 percent effort of the staff of the firm.
When it comes to the application of the Pareto Principle, it is being effectively used in areas like management, HR and manufacturing. Actually, Pareto Principle was meant for Pareto’s own country where he explained that 80 percent of the property was owned by 20 percent of the population of Italy.
When the Pareto Principle is applied in business, then it can be explained like this that:
- 80 percent of the profit of the firm depends on 20 percent of the customers.
- 80 percent of the increase in sales will depend on a 20 percent increase in the production of the product.
- 80 percent of the complaints will come from 20 percent unsatisfied customers
- 80 percent increase in profit will come from 20 percent more effort from each of the employees.
It can be said that Pareto Principle can induce us to put more efforts in a task.
- Debt ratios
- Liquidity ratios
- Profitability ratios
- Asset management ratios
- Cash Flow Indicator Ratios
- Market value ratios
- Financial analysis
- Business Terms
- Financial education
- International Financial Reporting Standards (EU)
- IFRS Interpretations (EU)
- Financial software
Most WantedFinancial Terms
- Most Important Financial Ratios
- Debt-to-Equity Ratio
- Financial Leverage
- Current Ratio
- Interest Coverage Ratio (ICR)
- Solvency Ratio
- Break-even Point
- Debt Service Coverage Ratio
- Receivable Turnover Ratio
- Return On Capital Employed (ROCE)
Have 10 minutes to relax?Play our unique
Play The Game