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Almost all of us have heard about the 80:20 principle, also known as the Pareto principle which says:

80% of the effects come from 20% of the causes

This means that 80% of what we accomplish is due to 20% of the efforts we put into it. This principle has only been used in recent years to aid in identifying ways to optimize resources in logistics, software engineering, networks and quality control, but this idea was really discovered in 1897 by an Italian economist and sociologist Vilfredo Pareto while studying patterns of wealth in England. Pareto noticed that 20% of people had 80% of the money and that this figure remained constant in almost everything he analysed, regardless of the time or the country in question. At that time, the study of Pareto did not transcend beyond anything but data. But in 1953, Japan invited the American engineer Joseph M. Juran to give a lecture on statistical quality control. A few years earlier, Juran noted that the Pareto principle can be applied when sorting a long list of defects according to the frequency with which they appeared, as few defects caused most failures. Juran and his fellow expatriate W. Edwards Deming-transformed  (separately but in parallel) the  manufacturing standards in Japan, making the country a world quality reference. One of the great ironies in the history of business is that these two Americans, ignored in their own country, gave  the Japanese industry the know-how to defeat the American manufacturing system. American industry was forced to go to Japan to learn from what they had rejected.

After Juran had exported its ideas to Japan, IBM was one of the first U.S. companies to apply the Pareto principle, although in this case, not to reduce the number of defects. In the early 1960s, they realized that computers used approximately 80% of their time to run 20% of the operating code. They quickly rewrote 20% of the software to have faster access to be much more easier to use. The result? IBM’s computers became faster and more efficient than the competition, at least in most applications. The lesson was well learned by those who came after, like Apple and Microsoft.

According to the consultant and writer Richard Koch, Pareto can also be used within companies. 80% of the profits generated 20% of segments, 20% of customers and 20% of the products. What’s more, 80% of the benefits usually produce 20% more employees.

80:20 The principle can be applied productively to any industry, any company, any function within the organization and any job. Richard Koch, 1997

Therefore, a company should be able to be more profitable if you focus on those markets and customers who already are producing 80% of their profits. In parallel, we should give more support and resources to that 20% of the company, people, shopping, sales teams or regions, which produce 80% of profit. 80:20 But the principle should not be interpreted strictly. For example, in many bookstores for 80% of sales comes from (surprise, surprise!) 20% of the book titles. Should we get rid of the other 80% to reduce your stock? No, because customers who walk into a bookstore expect to find a wide range of books, although they will not really buy any. Reducing the range of books will make the customers switch to the competition. However, it would be advisable to place these books in a prominent area of ​​20% or identify your most profitable customers and give them exactly what they want.

The Pareto chart is easy to build and is the tool that allows us to identify those few keys, which can make the melody sound better. In this link you can download a simple PDF tutorial on how to construct a Pareto chart using Microsoft Excel.