The Pareto Principle

It is not important anymore where the term "Pareto Principle" comes from. It is an old idea that was taken off the bookshelf, dusted off, and modernized. Vilfredo Pareto, an economist in the early 1900's, noticed that 20% of the landholders paid 80% of the income to the Italian government. He was Italian. The same applies to most Western governments.

There may be some mathematical reason underlying the Pareto Principle, but I think it is a convenient co-incidence. But it is a very useful coincidence.

There are several practical ways to use the Pareto Principle.
    1. Identify the 20% of your stock that is fast-moving.
    2. This is the inventory that you never want to be out-of-stock.
    3. Only "buy up" on specials that are in the 20% group.
    4. A small increase in prices in this group will generate the larger profit, but it may cause the greater number of complaints.
    5. A larger increase in the other 80% will be less noticed and more tolerated.
    6. A full strategy might be to increase prices less in the 20% and more in the 80% group.
    1. It may not be quite 20%/80%, but regularly evaluate which employees make the most sales.
    2. The fault may not be the employee's. You may have the employee scheduled at a time when sales are low. In that case, you may not need that employee.
    3. Or it may be that it is the employee's shortcoming. You should then "trade-up."
    1. In a C-store, it will not be the case that 20% of the individuals generate 80% of the sales.
    2. But it may be that certain demographic groups are more important than others.
    3. Let this influence but not dominate your merchandising decisions.
    1. The Paretto Principle applies very well to inventory control.
    2. Merchants are sometimes lulled into complacency if the gross profit margin is satisfactory or even better than average.
    3. $1,500 sales may generate a gross profit of 45% in a particular category. That is good.
    4. But if the inventory is $10,000, then about $6,000 to $7,000 is useless inventory. Get rid of it. Convert it to cash.
  5. The Pareto Principle is a way of looking at business. It may not be as mathematical as other principles, but it is one of the most useful and handy principles that encourages dilligence in management.