The Pareto Principle And Pareto Analysis In A Nutshell

The Pareto Analysis is a statistical analysis used in business decision making that identifies a certain number of input factors that have the greatest impact on income. It is based on the similarly named Pareto Principle, which states that 80% of the effect of something can be attributed to just 20% of the drivers.

Understanding the Pareto Analysis

The Pareto Analysis was named after Italian economist Vilfredo Pareto, who noted that 80% of the total income earned in Italy went to 20% of the population.

In a modern business context, the principle is evident in a variety of settings.

For example:

  • 20% of a product range accounts for 80% of profits.
  • 80% of customer complaints relate to 20% of products or services.
  • 20% of the workforce accounts for 80% of company revenue.
  • 80% of meeting decisions come in 20% of the total meeting time.

Conducting a Pareto Analysis

Although the applications of a Pareto Analysis are vast, certain principles will apply to most situations.

Following is a six-step process that businesses can use.

1. Identify the problems

Start by writing a list of the problems that need resolving.

2. Identify root causes

Then, identify the fundamental cause of each problem. Note that there could be multiple causes of a single problem.

3. Score the problems

In step 3, it is time to score each problem.

The scoring method being utilized will depend on the industry and the nature of the problem itself.

For example, a business trying to increase profits might score each problem based on how much it is costing them. 

Indeed, cost is a common problem in business.

But problems can also be scored based on duration or the number of times they occur in a specified period.

4. Group problems

Group the problems according to the root cause.

Perhaps a group is focused on customer satisfaction, while another on quality control.

5. Tally the scores

Now, add the scores for each group.

The group with the highest score is the top priority, as it is part of the 20% of factors causing 80% of the problems.

Sometimes, two or even three groups may be causing the majority of problems.

6. Action

Lastly, allocate resources to the problems with the highest scores and thus the most potential to impact on profits, customers, or sales.

Advantages of the Pareto Analysis


The analysis allows businesses to quickly and accurately identify factors that are contributing to a significant proportion of their problems.

Problem-solving ability

Many workplace problems are intangible in the sense that personnel does not agree on their scope or even on their definition.

The Pareto Analysis allows people to come to a consensus on the main problems facing an organization.

This also increases morale and cohesiveness in the process.

Improved decision making

A company that can quantify its main problems is better able to make decisions to counteract them.

Quantifiable problems are also better prepared for so that they have less chance of recurring in the future.

Pareto Analysis Case Study

As we saw, the Pareto analysis starts from the premise that a small number of factors (typically 20%) account for most of the impact (typically 80%) in a given situation.

One example of Pareto analysis is a study of customer complaints at a retail store.

Imagine that the retail store collected data on all customer complaints over one year.

They can leverage the Pareto analysis to identify the top 20% of complaints that accounted for 80% of these same complaints.

From a Pareto analysis, it would be simple to show how the top complaints were related to product quality, customer service, and shipping delays.

That information could be used to develop strategies to address these complaints and improve the overall customer experience.

Thus, the retail store can improve the quality of its products by implementing stricter quality control measures and conducting more frequent product testing.

And they can provide additional training for their customer service representatives and implement more flexible return policies.

Or perhaps to address shipping delays by investing in new technology to track and manage shipments more efficiently.

In other words, Pareto analysis can help businesses identify the key factors causing most of the issues.

Thus employing strategies that make it possible to tackle these issues and improve, with minor efforts, the overall experience for customers!

Key takeaways

  • Fundamentally, the Pareto Analysis is a statistical technique that identifies a limited number of factors that produce a significant overall effect.
  • The Pareto Analysis has a vast range of applications in business settings, allowing organizations to target problems that erode profits or budget expenditure.
  • The Pareto Analysis is an efficient technique that brings personnel together to quantify and then work to address tangible problems.

What are the steps to conduct a Pareto Analysis?

What are the advantages of a Pareto Analysis?

The key advantages of a Pareto Analysis can be grouped into:

What is the Pareto Principle in simple definition?

The Pareto Principle is a theory that postulates that for most human endeavors, 20 percent of the input determines 80 percent of the output. This postulate, of course, will depend on the context, where the Pareto Law might get less skewed (like in cases in which the 30% of input determines the 60% of output) and more skewed (where 5-10% of the input determines the 80-90% of output).

How do we use Pareto Principle in everyday life?

One way to apply the Pareto Principle to your life is by enhancing productivity or well-being by identifying the less impactful activities and yet giving you more stress. Take the case of minor tasks you do daily (like checking up on your smartphone) which have little impact on your life. With the Pareto Analysis, you can identify these low-impact inputs to enhance your life and productivity.

How to apply Pareto Principle to your business?

In times of constraints and crisis, the Pareto Analysis can help identify these parts of the business with low impact and yet require considerable maintenance. Take the case of a company that sells a product to a thousand customers. Yet, of these customers, only 100 impacts the bottom line, and yet the remaining 900 smaller customers are the ones that require the most support, thus, consuming the company’s resources and requiring a large team. This is an extreme case of Pareto, where 10% of the input determines 90% of the output. In this case, the company can cut out the smaller customer segments, which is not profitable to make t business viable.

Connected Analysis Frameworks

Failure Mode And Effects Analysis

A failure mode and effects analysis (FMEA) is a structured approach to identifying design failures in a product or process. Developed in the 1950s, the failure mode and effects analysis is one the earliest methodologies of its kind. It enables organizations to anticipate a range of potential failures during the design stage.

Agile Business Analysis

Agile Business Analysis (AgileBA) is certification in the form of guidance and training for business analysts seeking to work in agile environments. To support this shift, AgileBA also helps the business analyst relate Agile projects to a wider organizational mission or strategy. To ensure that analysts have the necessary skills and expertise, AgileBA certification was developed.

Business Valuation

Business valuations involve a formal analysis of the key operational aspects of a business. A business valuation is an analysis used to determine the economic value of a business or company unit. It’s important to note that valuations are one part science and one part art. Analysts use professional judgment to consider the financial performance of a business with respect to local, national, or global economic conditions. They will also consider the total value of assets and liabilities, in addition to patented or proprietary technology.

Paired Comparison Analysis

A paired comparison analysis is used to rate or rank options where evaluation criteria are subjective by nature. The analysis is particularly useful when there is a lack of clear priorities or objective data to base decisions on. A paired comparison analysis evaluates a range of options by comparing them against each other.

Monte Carlo Analysis

The Monte Carlo analysis is a quantitative risk management technique. The Monte Carlo analysis was developed by nuclear scientist Stanislaw Ulam in 1940 as work progressed on the atom bomb. The analysis first considers the impact of certain risks on project management such as time or budgetary constraints. Then, a computerized mathematical output gives businesses a range of possible outcomes and their probability of occurrence.

Cost-Benefit Analysis

A cost-benefit analysis is a process a business can use to analyze decisions according to the costs associated with making that decision. For a cost analysis to be effective it’s important to articulate the project in the simplest terms possible, identify the costs, determine the benefits of project implementation, assess the alternatives.

CATWOE Analysis

The CATWOE analysis is a problem-solving strategy that asks businesses to look at an issue from six different perspectives. The CATWOE analysis is an in-depth and holistic approach to problem-solving because it enables businesses to consider all perspectives. This often forces management out of habitual ways of thinking that would otherwise hinder growth and profitability. Most importantly, the CATWOE analysis allows businesses to combine multiple perspectives into a single, unifying solution.

VTDF Framework

It’s possible to identify the key players that overlap with a company’s business model with a competitor analysis. This overlapping can be analyzed in terms of key customers, technologies, distribution, and financial models. When all those elements are analyzed, it is possible to map all the facets of competition for a tech business model to understand better where a business stands in the marketplace and its possible future developments.

Pareto Analysis

The Pareto Analysis is a statistical analysis used in business decision making that identifies a certain number of input factors that have the greatest impact on income. It is based on the similarly named Pareto Principle, which states that 80% of the effect of something can be attributed to just 20% of the drivers.

Comparable Analysis

A comparable company analysis is a process that enables the identification of similar organizations to be used as a comparison to understand the business and financial performance of the target company. To find comparables you can look at two key profiles: the business and financial profile. From the comparable company analysis it is possible to understand the competitive landscape of the target organization.

SWOT Analysis

A SWOT Analysis is a framework used for evaluating the business’s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.

PESTEL Analysis

The PESTEL analysis is a framework that can help marketers assess whether macro-economic factors are affecting an organization. This is a critical step that helps organizations identify potential threats and weaknesses that can be used in other frameworks such as SWOT or to gain a broader and better understanding of the overall marketing environment.

Business Analysis

Business analysis is a research discipline that helps driving change within an organization by identifying the key elements and processes that drive value. Business analysis can also be used in Identifying new business opportunities or how to take advantage of existing business opportunities to grow your business in the marketplace.

Financial Structure

In corporate finance, the financial structure is how corporations finance their assets (usually either through debt or equity). For the sake of reverse engineering businesses, we want to look at three critical elements to determine the model used to sustain its assets: cost structure, profitability, and cash flow generation.

Financial Modeling

Financial modeling involves the analysis of accounting, finance, and business data to predict future financial performance. Financial modeling is often used in valuation, which consists of estimating the value in dollar terms of a company based on several parameters. Some of the most common financial models comprise discounted cash flows, the M&A model, and the CCA model.

Value Investing

Value investing is an investment philosophy that looks at companies’ fundamentals, to discover those companies whose intrinsic value is higher than what the market is currently pricing, in short value investing tries to evaluate a business by starting by its fundamentals.

Buffet Indicator

The Buffet Indicator is a measure of the total value of all publicly-traded stocks in a country divided by that country’s GDP. It’s a measure and ratio to evaluate whether a market is undervalued or overvalued. It’s one of Warren Buffet’s favorite measures as a warning that financial markets might be overvalued and riskier.

Financial Analysis

Financial accounting is a subdiscipline within accounting that helps organizations provide reporting related to three critical areas of a business: its assets and liabilities (balance sheet), its revenues and expenses (income statement), and its cash flows (cash flow statement). Together those areas can be used for internal and external purposes.

Post-Mortem Analysis

Post-mortem analyses review projects from start to finish to determine process improvements and ensure that inefficiencies are not repeated in the future. In the Project Management Book of Knowledge (PMBOK), this process is referred to as “lessons learned”.

Retrospective Analysis

Retrospective analyses are held after a project to determine what worked well and what did not. They are also conducted at the end of an iteration in Agile project management. Agile practitioners call these meetings retrospectives or retros. They are an effective way to check the pulse of a project team, reflect on the work performed to date, and reach a consensus on how to tackle the next sprint cycle.

Root Cause Analysis

In essence, a root cause analysis involves the identification of problem root causes to devise the most effective solutions. Note that the root cause is an underlying factor that sets the problem in motion or causes a particular situation such as non-conformance.

Blindspot Analysis


Break-even Analysis

A break-even analysis is commonly used to determine the point at which a new product or service will become profitable. The analysis is a financial calculation that tells the business how many products it must sell to cover its production costs.  A break-even analysis is a small business accounting process that tells the business what it needs to do to break even or recoup its initial investment. 

Decision Analysis

Stanford University Professor Ronald A. Howard first defined decision analysis as a profession in 1964. Over the ensuing decades, Howard has supervised many doctoral theses on the subject across topics including nuclear waste disposal, investment planning, hurricane seeding, and research strategy. Decision analysis (DA) is a systematic, visual, and quantitative decision-making approach where all aspects of a decision are evaluated before making an optimal choice.

DESTEP Analysis

A DESTEP analysis is a framework used by businesses to understand their external environment and the issues which may impact them. The DESTEP analysis is an extension of the popular PEST analysis created by Harvard Business School professor Francis J. Aguilar. The DESTEP analysis groups external factors into six categories: demographic, economic, socio-cultural, technological, ecological, and political.

STEEP Analysis

The STEEP analysis is a tool used to map the external factors that impact an organization. STEEP stands for the five key areas on which the analysis focuses: socio-cultural, technological, economic, environmental/ecological, and political. Usually, the STEEP analysis is complementary or alternative to other methods such as SWOT or PESTEL analyses.

STEEPLE Analysis

The STEEPLE analysis is a variation of the STEEP analysis. Where the step analysis comprises socio-cultural, technological, economic, environmental/ecological, and political factors as the base of the analysis. The STEEPLE analysis adds other two factors such as Legal and Ethical.

Activity-Based Management

Activity-based management (ABM) is a framework for determining the profitability of every aspect of a business. The end goal is to maximize organizational strengths while minimizing or eliminating weaknesses. Activity-based management can be described in the following steps: identification and analysis, evaluation and identification of areas of improvement.

PMESII-PT Analysis

PMESII-PT is a tool that helps users organize large amounts of operations information. PMESII-PT is an environmental scanning and monitoring technique, like the SWOT, PESTLE, and QUEST analysis. Developed by the United States Army, used as a way to execute a more complex strategy in foreign countries with a complex and uncertain context to map.

SPACE Analysis

The SPACE (Strategic Position and Action Evaluation) analysis was developed by strategy academics Alan Rowe, Richard Mason, Karl Dickel, Richard Mann, and Robert Mockler. The particular focus of this framework is strategy formation as it relates to the competitive position of an organization. The SPACE analysis is a technique used in strategic management and planning. 

Lotus Diagram

A lotus diagram is a creative tool for ideation and brainstorming. The diagram identifies the key concepts from a broad topic for simple analysis or prioritization.

Functional Decomposition

Functional decomposition is an analysis method where complex processes are examined by dividing them into their constituent parts. According to the Business Analysis Body of Knowledge (BABOK), functional decomposition “helps manage complexity and reduce uncertainty by breaking down processes, systems, functional areas, or deliverables into their simpler constituent parts and allowing each part to be analyzed independently.”

Multi-Criteria Analysis

The multi-criteria analysis provides a systematic approach for ranking adaptation options against multiple decision criteria. These criteria are weighted to reflect their importance relative to other criteria. A multi-criteria analysis (MCA) is a decision-making framework suited to solving problems with many alternative courses of action.

Stakeholder Analysis

A stakeholder analysis is a process where the participation, interest, and influence level of key project stakeholders is identified. A stakeholder analysis is used to leverage the support of key personnel and purposefully align project teams with wider organizational goals. The analysis can also be used to resolve potential sources of conflict before project commencement.

Strategic Analysis

Strategic analysis is a process to understand the organization’s environment and competitive landscape to formulate informed business decisions, to plan for the organizational structure and long-term direction. Strategic planning is also useful to experiment with business model design and assess the fit with the long-term vision of the business.

Related Strategy Concepts: Go-To-Market StrategyMarketing StrategyBusiness ModelsTech Business ModelsJobs-To-Be DoneDesign ThinkingLean Startup CanvasValue ChainValue Proposition CanvasBalanced ScorecardBusiness Model CanvasSWOT AnalysisGrowth HackingBundlingUnbundlingBootstrappingVenture CapitalPorter’s Five ForcesPorter’s Generic StrategiesPorter’s Five ForcesPESTEL AnalysisSWOTPorter’s Diamond ModelAnsoffTechnology Adoption CurveTOWSSOARBalanced ScorecardOKRAgile MethodologyValue PropositionVTDF FrameworkBCG MatrixGE McKinsey MatrixKotter’s 8-Step Change Model.

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