Those in charge always have many decisions to make. The question is, which should be tackled first? Many business leaders conduct a Pareto analysis to answer that question. The Pareto analysis helps prioritize decisions by which ones will have the greatest influence on overall business goals and which ones will have the least impact.
The Pareto analysis, or Pareto principle, is also known as the 80/20 rule because it is based on the idea that 80% of a project’s benefit can come from doing 20% of the work. Conversely, 80% of a situation’s problems can be traced to 20% of the causes.
The technique is named after Italian economist Vilfredo Pareto, who observed in 1895 that 80% of Italy’s wealth belonged to only 20% of the population, according to ResumeLab.
While the Pareto principle is primarily used in business contexts, it exists in others. ResumeLab offers examples of the Pareto principle in the era of the COVID-19 pandemic, marketing and business, time management, computing, and online dating.
These are some business and marketing examples:
[Related: How to Deal With Difficult Customers]
Here are some of the top benefits of using a Pareto analysis:
There are several ways to conduct a Pareto analysis, and they all revolve around the same guiding principles. According to the website Mind Tools, these are the six steps to conduct a Pareto analysis:
If you want a graphical representation of the problems, the Process Excellence Network says to divide each problem’s score by the grand total of all of the scores to get a percentage. Then, draw a chart with a horizontal axis and two vertical axes. Mark the left vertical axis in increments from zero to the grand total of all the problem scores. On the other side, mark the right vertical axis in increments from 0% to 100%. [Read related article: What Is a Decision Matrix? Definition and Examples]
Next, construct a vertical bar diagram, with the highest percentage score on the left and lowest on the right. According to the Process Excellence Network, the height of each bar should correspond with the value on the left axis and the percentage of the total on the right axis.
Finally, add a line graph to the top to figure out what percentage of the total problems will be solved when more than one are addressed.
“Beginning at the left zero point, plot a line showing the cumulative percentage total reached with the addition of each problem classification,” writes Steven Bonacorsi on the Process Excellence Network website. “The line should end at the 100% mark on the right axis.”
After making a Pareto chart, create a vertical bar diagram and add a line graph to the top if you want a graphical representation of the problem.
The Pareto analysis helps managers to focus on what is most important and urgent for their business. Here are some examples of how businesses use this tool:
Pareto analysis helps businesses understand what they need to focus on and make improvements in each of these areas.
There are many ways for businesses to use a Pareto analysis to their advantage. For example, if a company wants to improve customer service at a call center, the first thing they need to do is survey customers to find out why they were unhappy with the call center’s service.
After getting customer responses back, the call center can divide the information by complaint category, which may include “too long on hold,” “no evening or weekend staff,” “not knowledgeable,” “not courteous,” “transferred too many times,” “could not locate file,” “no phone payment options,” “hard to understand representative,” and “charged more than promised.”
From there, they would total the number of complaints in each category and determine the percentage of each complaint compared against the total amount. Then, they would find the cumulative percentage of the categories by adding them together. Based on this data, they can determine which issues account for 80% of the problems. In our call center example, the primary culprits might be “too long on hold,” “no evening or weekend staff” and “not knowledgeable,” as they account for approximately 80% of the total complaints. [Related: The Best Call Center Services]
In light of the analysis, it is easy to determine that the call center needs to concentrate their efforts on those three complaints to improve their overall customer service.
Other examples are available online:
Chad Brooks contributed to the writing and research in this article.