If you had to make as many sales as possible within a limited time at work, would you choose a product with a high unit price that rarely sells and actively expand sales? Or do you choose products that sell frequently but have low unit prices and sell them as hard as you can?
This time, I would like to introduce the Pareto Principle, which can be used as a reference in times like this and allows you to think very efficiently.
What is the Pareto principle?
The Pareto principle is a law proposed by Italian economist Vilfredo Pareto, and is also known as the law of dispersion or the 80/20 rule.
When Pareto used statistical analysis in mathematical economics to clarify the imbalance in income distribution, he said, “80% of society’s wealth is concentrated among 20% of high earners, and the remaining 20% is Discovered the law that 80% of the income is distributed to low-income earners. This became known as the Pareto principle.
This law can now be widely applied in business, including quality, inventory, sales management, and marketing.
This kind of law is called a “power law” and is used as a model when performing statistics.
How to use it for marketing
In cases related to sales, such as the one mentioned at the beginning, the Pareto principle may be used as a basis for business decisions using a method called ABC analysis.
For example, suppose that the sales of products A to J handled by a certain store are aggregated over a certain period of time and compiled into a table ranked by total gross profit (a table compiled for the purpose of ABC analysis is called an ABC classification table). Masu.
If you plot this gross profit table on a Pareto chart (most spreadsheet software provides a type of graph), it will look like the following (Table 1).
In this case, it can be confirmed that the top three products C, D, and A out of 10 products account for approximately 76% of the overall gross profit, and the information obtained here can be used as a reference for purchasing and inventory. That’s why. Once you create tables and graphs, you can use them again and again, so if you aggregate them weekly or monthly, you can use them to predict sales trends. In addition, since sales floor space is limited in stores, etc., it can also be used as a guideline when you want to display products that will increase profits and sales in a large area.
In addition, it can be used in marketing to optimize the placement of salespeople at sales offices, budget allocation for promotional campaigns, and the frequency of customer approaches.
The Pareto principle can be used outside of marketing.
The Pareto principle applies not only to economics but also to a variety of other cases, including natural and social phenomena.
- 80% of resident taxes are paid by the wealthy 20% of residents.
- 80% of a city’s traffic is concentrated on 20% of the city’s roads.
- 80% of the words used in sentences are equivalent to 20% of the total number of words.
Of course, in reality, not all events have a clean 80:20 split. However, just like the law of probability, it seems that when many events are collected, it tends to become closer to the Pareto law.
Notes on the Pareto principle
Although the Pareto principle is often useful, there are some points to be careful of. This law is useful for analysis in cases such as selling products, as mentioned in the example of ABC analysis, but care must be taken when applying it to operations involving humans.
Although this is an extreme example, let’s say you keep 20% of your excellent salespeople who make 80% of your total sales, and transfer the other salespeople to other jobs. As a result, the performance of the remaining salespeople, who were supposed to be excellent, may decline. This is said to be caused by factors other than the Pareto principle, such as a “competitive spirit” and a “sense of tension.”
Another thing to note is that the remaining 80% of products classified using ABC analysis cannot be immediately removed from the shelves and filled with only 20% of the products. In the case of stores, some customers enjoy choosing from a large selection of products.
In other words, what is important is the relationship between 20% and 80% and the balance between them. This rule does not necessarily apply to everything.
summary
◆Pareto’s law is a power law that states that the top 20% account for 80% of the total, and is used as a model when performing statistics.
◆The Pareto principle applies not only to economics, but also to a variety of other cases, including natural and social phenomena.
◆When conducting analyzes related to sales and sales, the Pareto principle and ABC analysis techniques can be used as material for management decisions.
◆However, it is not sufficient to use the Pareto principle for all analyses. Check the relationship between 20% and 80% and pay attention to the balance.