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I regularly find myself reading about the Pareto principle in productivity literature. Generally, it's quoted as '80% of the results come from 20% of the work', or more popularly, '80% of the sales come from 20% of the customers'. A particular offender of this line of thinking is Tim Ferris, who spends a lot of the four hour workweek recommending that people drop the 80% of time they spend on work and take the financial hit of 20% loss of sales (he says at lot of other things, but this is simple an aspect I'm having trouble with).

Here's my issue.

Let's say I'm a normal everyday salesman, working 40 hours and selling $1,000 worth of stock a week. I find out which 20% of my customers are providing 80% of the profit and I ignore all others. I now find myself working 20% of the hours (so 8hours a week) and selling $800 worth of stock. Yay!

One year later, I decide to look again at my customers, and pick out the 20% of the remainder that are providing 80% of the remaining value. Again I drop the 80% of customers I decide I don't need. If the Pareto Principle is a genuine thing, I should now find myself working two hours a week for $640.

Next year I do the same again and I'm now working for just over 20 minutes for $512.

I realise I have time to get my old job back and start again except, this is clearly getting silly. Have I misunderstood something? Or is this one of those times where a scientific observation is being invoked in name only to make an unrelated point?

EDIT:

Okay, I don't think I was very clear - (althought @jay's answer appears to cover) - I wasn't asking what the advantages were, or suggesting the method - I was asking if the Pareto principle as generally quoted is in any way related to the Pareto principle as it was formulated and should be used. (For example, I wouldn't have been suprised by an answer which said "The Pareto principle was formulated for countries/companies/fruit, and thus does not make any sense to overgeneralise to a list of jobs"

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6 Answers 6

I think it only works the first time around. If you take a long enough period of time, it will likely settle into the Pareto principle. You can't really reapply it to itself once you've filtered out the group giving you the most money, but you can do an analysis over a new, large data set to see which ones are giving you your 80%.

There's a logical flaw in your example... less customers doesn't mean proportionally less time. Economy of scale means that serving 10 customers takes more than half the time for serving 20 customers. If you have only one customer, it will likely take a lot more than 20 minutes to serve her.

And then there's also the consequences of being the guy who's known for firing bad customers, which makes the customers either buy more or stop buying.

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I think all of your points are correct - but I suspect I didn't ask the question correctly... I probably should have written the more blunt 'Can the Pareto Principle ever be correctly applied to a sample size of 1 (the self)?'... but It might also be a though that needs more developing before I put it up... –  Joe Jul 17 '13 at 22:28

I am no expert on the principal or practice but I think you may be looking at it from the wrong point of view. I believe the concept is to adjust focus and improve productivity with consistent re-evaluation of what is working for you and the results which you are getting.

So if 80% of your customers are generating 20% profit, in theory then that is ok, unless you are spending 80% of your efforts to get 20% profit. It is effort versus results.

There are a few scenarios here:

  1. You spend 80% of your time with customers who generate 20% of your revenue. Removing those 20% gives you 80% more time to build new customer relationships.

    • This gives you a time versus income improvement. (hopefully)
  2. You spend 80% of you time at work and 20% of the time, doing things you want. Reducing the 80% of time you get to do more of what you want.

    • This give you more time to do what you want.

It isn't about reduction, but rather redirecting efforts and improving results.

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There is another variable in this equation: you need time to evaluate, which customers give you 80% profit. If you want new customers, you have to "test" them to find out if they fall into 20% or 80% caterogy. And you do want new customers, because the world changes. So you need to spend these 80% of your time for some period to be able to choose your golden geese.

Only if you can say, that you don't want new customers and your old customers are large in number and stable as stone, you can apply your idea. But beware, 20% and 80% is not guaranteed, it's just a vague idea. Your numbers may be 90 and 10 on the first iteration and 40 and 60 on the second one.

The practical conclusion is that you should look for and try to get rid of work which gives too few profit. But there is no silver bullet, adp Pareto principle is not a physical law or proven mathematical theorem.

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I think a better solution is to determine the balance between how much you want to earn and work. Focus on the top 20% and if you have time left over, pick someone from the next group. Why not hire 10 jr. sales people and spend 8 hrs a week managing them and getting an over-ride on their commission? That's probably more inline with the Ferris model.

The problem is your sales manager doesn't give a hoot about you being able to work 8 hours a week. If your over-all sales figures drop 20% a year, you're going to get fired. Do the math if you're expected to grow your sales by 10-20%.

In your industry, you should know that past predictors are no guarantee of future success. Is it common for the same sales person to get the most sales from the same clients year after year? If not, you can't predict. Let's say you're given 10 sales leads. Good sales people should know which 2-3 have the most potential. Changes are, you're lucky to pick 5 out of the ten and hope the top 2 are in that group.

Most companies do get 80% of their business from 20% of their marketing dollars, but the problem is, they never know which 20%.

Your logic would eventually take you to the point where you only have one client. Then what? And what if your best client over the last 2 years isn't the best one next year and here you've dropped all the rest?

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The Pareto Principle is a statistical observation, not a rule. As a statistic it comes from observing a large sample. Whittling down your customer base enough will render this invalid. A bit similar to how looking at 5 water molecules doesn't behave anything like a full glass of water.

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The fact that you can't apply the Pareto Principle ad infinitum, as your line of reasoning shows, doesn't mean that the principle is useless. Once you have optimized your client base once, if you have done your job well you probably will end up with a client base where you devote the same effort to each remaining client.

The world is messy and not all populations will match the ideal characteristics of the principle. You can think of the Pareto Principle as a first line of defense to optimize your cost/benefits metric and, to look at your client base periodically in case the messiness of real world has introduced that inefficiency again when you were not looking.

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