Pareto Principle

Posted in Marketing and Strategy Terms, Total Reads: 640

Definition: Pareto Principle

A principle named after an Italian economist, Vilfredo Pareto, states an unequal relationship between cause and effect. According to the principle, about 80%(the majority) of outcome are due to contribution of a minority i.e. 20% of factors or agents. This principle is also known a 80-20 rule, principle of factor sparsity, principle of least effort, principle of imbalance or law of the vital few.

It is a heuristic principle and cannot be explained by a scientific law or method. It exemplifies the imbalance between input or output. For example- 80% of a firms profit can be obtained by 20% of the staff. 80% of the sales would be generated by 20% of the consumers. 80% of the inventory is due to 20% of the item. The principle has rule-of-thumb application in many places but it is often misused. The assumption of the law is that most of the result are an effect of small number of causes.

The 80-20 rule may not apply to all the situations not is any criteria that the ratio or percentage should add up to 100. There are more successive rules like 64-4 etc. The law can be used in the field of marketing, selling situations, time, management, distribution of income or other such scenarios. The Pareto principle originated when Pareto explained ownership of 80% of the property in Italy by 20% of the total population.

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