Understanding the Pareto Principle

Product Portfolio Management

Your company might make a variety of products, but each SKU probably varies in popularity. In order to determine how much resources you should spend on each SKU, consider using the Pareto Principle in your analysis. Analyze your sales data and find out which products generate the most revenue and profit. These top-performing products should receive a significant portion of resources, while underperforming ones may need to be re-evaluated or discontinued.

For example, a snack food manufacturer may discover that a handful of snack varieties account for 80% of their sales. Focusing on promoting these top-selling products can lead to higher revenues and reduced operational costs associated with less popular items.

Customer Segmentation

Another application of the Pareto Principle has to do with your customer base. A small percentage of customers often contribute the most to a company's revenue. After all, a repeat buyer is going to have a much higher lifetime value than someone who buys a product only once and then moves on. By identifying these high-value customers, companies can tailor their marketing and customer retention strategies to serve them better and win their business over.

Consider a beverage company that realizes 20% of its customers account for 80% of its sales. This insight allows the company to develop loyalty programs, exclusive offers, and/or personalized marketing campaigns to retain and nurture these valuable individuals.

Marketing and Promotion

Companies can also use the Pareto Principle to fine-tune their marketing and promotion strategies. By identifying the most effective marketing channels and campaigns, they can allocate resources more efficiently rather than spending excess on activations that yield significantly lower ROIs.

If, for instance, social media advertising drives 80% of online sales, it makes sense to invest more in this channel while reducing expenditures on less effective platforms.

Data Analysis: Start by collecting and analyzing data related to your products, customers, and operations. This data can be collected from sales figures, customer feedback, and various analytical tools.

Identify the Vital Few: Using your analysis, determine which products, customers, or activities contribute the most to your company's success. These are your "vital few."

Allocate Resources: Once you've identified the vital few, allocate your resources strategically. Focus your efforts and investments on these high-impact areas.

(Note: This doesn’t necessarily mean removing all resources from lower-performing groups. After all, a low performer now may become part of the vital few in the future.)

Continual Monitoring: The business landscape is dynamic, so regularly review and update your strategy to ensure that your resources are consistently aligned with the areas that drive the best results. Review data and realign your strategy on a monthly, quarterly, or annual basis, depending on your application of the principle.