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Jargon Buster

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Pareto effect or pareto principle

What does this mean?

A general principle (first documented by Italian economist Vilfredo Pareto [1848–1923]) which observes that in many situations there is often a disproportion between inputs and outputs.

Frequently called the 80/20 effect, the idea here is that 80% of outputs or results (for example income) are generated by 20% of inputs or causes (for example customers).

But the key thing here is the differences in proportions, such that these will not always be exactly 80% and 20%. Indeed Mark Hazell (Marketing Director of the Theatre Royal Norwich), who was alerted to this by Roger McCann, points out that a 2001 paper by Micheaux and Gayet notes that:

‘In practice, the 80:20 rule is more often found to be a ‘15:35:50’ rule, where the top 15 percent [of customers] generate 50 per cent of revenue, the next 35 per cent generate 35 per cent of the revenue, and the remaining 50 per cent contribute 15 per cent of revenue or less; this rule is common in retail, for example.’