The 95:5 Rule (the Pareto Principle +)

The Pareto Principle, also known as the “80:20 Rule”, states that 80% of results flow from 20% of causes. So, for example, 80% of sales can come from just 20% of customers; 80% of road accidents occur in just 20% of accident locations; and maybe 80% of headaches are caused by just 20% of your friends. 80% of profits may come from just 20% of your products, 80% of the wear and tear on a carpet happens in just 20% of the surface area (near the doors), etc, etc. You get the idea.

(This 80:20 Rule is also named after Wilfredo Pareto, an economist, who identified that 80% of the wealth was owned by just 20% of the population.)

The point is that not all thing are equal. Indeed there is a disproportionality, with the ‘important few’ (20% or so) having more effect than the all the rest put together.

In terms of business, it’s crucial to identify the ‘important few’ from the ‘trivial many’ – and then pay special attention to them. Maybe the top 20% of customers that generate 80% of profits, maybe the top 20% of stock items that are responsible for 80% of sales.

Once you’ve identified the important few, it helps you to make decisions about priorities: which customers to provide even better service to, which items we must never let run out of stock, which projects to pay special attention to, which employees to keep at all costs … etc

In practice, the imbalance or skewing is even more pronounced than 80:20. I reckon it’s often more like the top 5% of causes (customers, items, investments etc) that can be responsible for 95% or more of effects (profits, sales, dividends etc). That’s why I call it the 95:5 Rule.

Sometimes it’s even more pronounced. Superfans might be just 1% of your customer base but they can account for more than 90% of your income and profits.

* Please contact me with examples of the 95:5 rule in practice in your creative enterprise. Thanks