Pareto Principle

Overview

The Pareto Principle or 80/20 rule says that 20% of the causes are responsible for 80% of the results. This principle can be applied in many different areas of business and life to make the most of your time and deliver meaningful results to your church, family, and business. I have used this principle to identify and complete high impact projects in my career as an engineer. These projects delivered the most impactful results and were sometimes very easy to complete once identified.

Many times we can get caught up in one thousand different things that need our attention, but we don’t sit back to look at the bigger picture and determine where your time will be best spent. People commonly describe this as “seeing the forest through the trees”. Once we step back and determine the real issues that are causing the problem we can use our time in the most effective place. The alternative is reacting to every new issue or problem where nothing is getting your full attention. Unless you have your high impact goals in front you, these new problems will take your attention away from where it is needed most. You will be working hard, but not necessarily smart. No progress will ever occur because the critical things are not being worked on. If you are constantly stressed and nothing ever seems to improve, you may benefit from this tool.

I will outline the steps to use this tool below. Once you have the framework down, you can apply this tool in many areas of your life to make meaningful improvements.

How To Use

Collect Data

The first step to using this tool successfully is to collect the data on what you are trying to analyze. They key to this step is making sure it is good data. What I mean by good data is that it must be actionable. Actionable data for a recipe would be like the example below. You should be asking yourself if the data you are collecting can actually be used to take action. The actionable data on the left I could measure out, purchase at the store, and prepare at the correct temperature. The non-actionable data on the right leaves me with more questions. I could try to take an action, but I would definitely make mistakes trying to do so. This principle applies to any data you collect. You may need to ask more questions or change how you are collecting your data. It is fundamental to get this step right to see results. There is a saying that applies to data “Garbage in, garbage out”. Without quality data, you are setup for failure. The data does not need to be perfect, just actionable.

Biscuit Ingredients

Analyze Data

The next step of using the Pareto principle is to gather your data and organize into a spreadsheet. You should place the item, reason, type, or other category in the first column. The second column will be your numerical data such as cost, time, engagement, number of offers, etc. Once you have your data in two columns, you will need to filter the data from largest to smallest numerical value. As shown in the example below, this would be the greatest revenue item sorted to the least revenue item.

You will then need to add three columns: % of Total, Cumulative %, and Cumulative % of Total Items. These columns will be used to determine the percentages of the 80/20 rule. The table below list the formula of each of these new columns.

% of Total	Cumulative %	Cumulative % of Total Items
(Item Revenue) / (Total Revenue)	(Item 3 %)+(Item 2 %)+(Item 1 %)	E2=(1/(COUNT(B2:B15))
=B2/SUM($B$2:$B$15)	=SUM($C$2:C4)	E2=1/(COUNT(B2:B15) E4=E2*COUNT($B$2$:B4)

Now you can fill the rest of the table with these formulas to produce the table above. You will see in the Cumulative % column we will be focusing on the items that produce 80% of the revenue for the Catholic gift shop. You will see on the next column that these items make up only 20% of the total number of items. This is the 80/20 rule. You are searching for the “critical few” items that account for the biggest contribution to revenue.

Once finding the critical few, it may be necessary to run another analysis to get some more information. If you wanted to know which rosaries, crucifixes, or paintings had the greatest contribution to revenue, you could run the analysis again on each of these three categories. You will then discover a similar pattern and have a list of your best selling items in the store.

Take Action

We now have a list of best selling items in the store after running a few Pareto analyses. Our goal of the first analysis may have been to determine where to spend money on inventory that is running low in the store. You may only have a certain amount and need to find out where it will best be put to use. The low inventory items were rosaries, candles, and stickers. Using the Pareto analysis, we saw that Rosaries were one of the “critical few” items accounting for a majority of store revenue. We now know this is the best area to spend our money on inventory because we will see the greatest return. We still have some questions on which rosaries to stock up on. Running a second analysis on all the different types of rosaries tells us that the top 20% of rosaries were all either blue or wooden. We can now take action and purchase a larger percentage of inventory for blue and wooden rosaries.

Some future data collection efforts can also be made by studying what makes the blue and wooden rosaries sell more than all the others. This will help when deciding to introduce new products, decide on what inventory to stock, and learn about your customers. The Pareto tool is incredibly useful and will result in continuous improvement in whatever area you apply it in.

Verify Results

The final step is to always verify that the actions you took. We run another analysis 6 months after our new inventory purchase and see if the blue and wooden rosaries were selling as we expected. The wooden rosaries continued to sell, but a drop was noticed in our blue rosaries. What happened? Was the analysis wrong? We need to find out and collect some data. Let’s say we reach out to some customers and ask why they bought the blue rosary specifically. Almost 80% of them said it was because it has the St. Benedict medal on it. The new blue rosaries we purchased did not have this medal. We found the problem! Assumptions were made about our customers that the only reason they purchased was due to the blue color. We could have benefitted from some more specific data and another analysis on the customer’s reasons for purchase.

It is critical to verify the results so that you do not keep making wrong decisions or assumptions that result in less than expected results.

Repeat

The Pareto principle is a vital tool for helping to solve problems and make improvements with the greatest impact. Discovering the “critical few” is going to be a continuous process. As big problems get solved, new problems will become the critical few. The goal is to continuously improve and grow at the greatest rate possible. By repeating this process every so often we can see whether our actions were effective in the past and where to take action in the future as changes are introduced.

Example

The Society of St. Vincent de Paul is having their annual meeting for the food bank and have dedicated $200 in their marketing budget to help increase donations. They have tasked the local youth minister (Joseph) to decide how to spend this money. He had just learned about the Pareto principle and decided to put it to use.

He started by filtering the results by only those who donated last year and then sorted the results from greatest to least. Joseph discovered that 80% of their recognition was from just two big ticket events such as the food drive and Gala. He now had some information to take action. After meeting with the group, he decided the best option would be another food drive each year instead of only one big event. The $200 would be spent to buy the bags and promotional materials for this new event.