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Pareto Principle

The Pareto Principle is named after an Italian economist Vilfredo Pareto who observed that 80% of the land in Italy in the early 1900's was owned by 20% of the population. This "rule" of thumb has become a very common business rule and is often validated by data in every day business.

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The Pareto principle is also referred to as the 80:20 rule. Typically as the "principle" states, you'll find that 80% of the defects of a process come from 20% of the causes or that 80% of sales come from 20% of customers etc. etc. etc.

This logic never matches perfectly (78:22, or 81:19 etc.) but it does often prove out to be the case. Thus, the Pareto principle has become a very common rule of thumb for business decision making.

Because Pareto references an economist's last name, it should always be capitalized. Therefore Pareto charts, Pareto principle, Pareto efficiency etc. are all properly represented with a capital "P"

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Uses of the Pareto Principle

There are a couple of developments of the principle that incorporate what is referred to as a Pareto Chart. A Pareto chart is simply a descending bar graph with a few very insightful bits of information included.

Pareto Charts are used in Pareto analysis where a series of Pareto charts are used in sequence to dig deeper into the tall bar on each successive Pareto chart. Pareto anlaysis is sometimes usefull in determining root cause or getting down to a hidden significant factor.

Pareto charts are also usefull in generally expressing the order of things and the application of the Pareto principle is fundamental in their establishment.

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