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Journal of Services Marketing

THE PARETO PRINCIPLE: ITS USE AND ABUSE


Robert Sanders

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To cite this document:
Robert Sanders, (1987),"THE PARETO PRINCIPLE: ITS USE AND ABUSE", Journal of Services Marketing, Vol. 1 Iss 2 pp.
37 - 40
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(1992),"Erratum", Journal of Product & Brand Management, Vol. 1 Iss 2 pp. 37-40 http://
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COMMENTARY

THE PARETO PRINCIPLE:


ITS USE AND ABUSE
Robert Sanders
Vilfredo Pareto was a late nineteenth-century
economist/sociologist who first noted and reported his observation that about 80 percent of
wealth was concentrated in about 20 percent of
a population. This is the basis for what we now
call the Pareto Principle.
J. M. Juran, one of the foremost practitioners
of statistical quality control, claims credit for
giving the Pareto principle its name. Juran's
Pareto Principle is sometimes known as the Rule
of 80/20.

Since that first reported observation by Pareto,


many other sociological, economic, political, and
natural phenomena have been observed empirically to follow a similar pattern. Examples come
to mind readily. For example, 80 percent of auto
accidents are caused by 20 percent of drivers.
Eighty percent of off-spec materials are accounted
for by 20 percent of the manufacturing steps.
Twenty percent of our population accounts for
80 percent of household moves. One might go
on almost indefinitely.

Robert E. Sanders has been Marketing Communications Manager for Rogers Corporation for the last 15 years. He spent
the previous 10 years with Rogers in sales and product management.
Rogers Corporation is a diversified manufacturing company marketing a variety of materials and components to
electronic OEM's and to other selected industrial markets.
Mr. Sanders graduated from Swarthmore College with a BA in Economics, magna cum laude and Phi Beta Kappa. He
also has a MA degree in Economics from the University of Virginia.
He served as an adjunct faculty person at the Quinebaug Valley Community College (CT) for several years in the
business department,"and also served on the Steering Commute of the Connecticut Economic Development Corporation.
Mr. Sanders currently is treasurer and member of the board of the Connecticut University Technical Industrial Park.

Vol. 1 No. 2 Fall 1987

37

THE JOURNAL OF SERVICES MARKETING

The Rule Applied to Statistical


Quality Control

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Such observations having been made, and the


phenomenon having been given a name and
been elevated to the status of a "Rule", there is
a strong inclination to try to find a use for it. In
quality assurance, practitioners like Juran and
Dr. Deming have found the principle extremely
valuable in identifying problems and ranking
these problems from the most important those
20 percent which cause 80 percent of quality
problems to the many problems of lesser import,
which account for only 20 percent of quality
problems.
Once one has identified the few problems
that account for 80 percent of discrepant quality,
one can concentrate efforts on seeking solutions
for those few problems rather than attempting
to tackle the whole gamut of problems at once.
Obviously this application of the Rule makes
eminent sense, and its impact on quality can
hardly be overestimated.

A Sales Manager's Dream?


There are also a number of potential applications for this Rule in marketing. Look at the
sales force. We find, for example, that 20 percent
of our salespeople are generating 73 percent of
our sales; we find that 16 percent of our products
are accounting for 85 percent of sales; also, 22
percent of our customers are producing 77 percent
of our sales. Such a distribution is not atypical.

for 80 percent of her sales. White should


concentrate on the six products that are returning
over 80 percent of his sales. Generally, the advice
of sales and marketing management is to go
where the business is.
The preceding is obviously oversimplified in
that Black may have 20 accounts producing 80
percent of his sales, but there will also be a
Pareto-like distribution operating in the geography
that Black covers. Eighteen of the major accounts
may be reasonably concentrated, the remaining
two major accounts hundreds of miles distant
from the concentration of those 18 accounts.
Furthermore, only four of the 20 accounts may
be buying profitable lines. Green and White
obviously face a similar situation.

There are a number of potential applications for this Rule in marketing.


However, once the interrelationships between
the number of accounts, their geographic location,
profitability, and so on are integrated, and once
management has assessed the cost of serving
the accounts, their profitability, and further
factors, there will emerge a new Pareto distribution which will indicate that Black and his
associates should concentrate their efforts on a
limited number of accounts and should sell a
limited number of products in a circumscribed
geographic area in order to maximize profitability
for the company (and for the salespeople?). Even
after the most sophisticated analysis of sales
territories, the Rule of 80/20 will still apply
and sales and marketing management will
still opt for heavy concentration on the few
accounts rather than the many.

Looking further at our sales force, we find


that Black has 100 active accounts. Twenty of
these accounts produce about 80 percent of
Black's sales. Green covers 100 counties, and
we find that 80 percent of her customers are
concentrated in only 24 counties. White sells 30
different products. Six account for 81 percent
of White's sales. This situation is also typical.
All of us in marketing positions have observed
this kind of phenomenon in a host of ways.

All of this is a legitimate practical application


of the Pareto principle if it is not carried to
excess and so long as it is understood that the
Rule is a static concept.

Given that we know all of this, what sort of


action is called for? How can we use this
information to improve sales and marketing
performance? Other things being equal, we would
probably advise Black to concentrate his efforts
on the 20 accounts that are giving him the 80
percent of his sales. Our advice to Green would
probably be that she spend up to 80 percent of
her time in the 24 counties that are accounting

What is meant by carrying the principle to


excess? An example should clarify my meaning.
Suppose Black's sales manager decides to apply
the Pareto principle in earnest. Black has 100
active accounts and 20 of them produce 80
percent of Black's sales. Salesman Brown has
120 accounts, but 24 of them produce 77 percent
of Brown's sales. The sales manager, Mr. Blue,
decides to terminate Brown and have Black handle

38

Comes a Nightmare

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THE PARETO PRINCIPLE: ITS USE AND ABUSE

accounts in both territories. He instructs Black


to spend his time on his 20 major accounts plus
the 24 major accounts previously served by
Brown. The same logic will eliminate both Ms.
Green and Mr. White. Black is the sole survivor,
still handling about 100 accounts, each one of
which contributed to 80 percent of the sales in
each territory consolidated into Black's final
territory.
Black is now working very hard, handling all
of the major accounts of Brown, Green, White,
et al. Will Black really be able to concentrate on
these 100 accounts as well as he did before?
The answer seems apparent: he won't. Black
begins to show the wear and tear of his new
assignment. Sales begin to slip.
Blue has reduced the sales force extensively,
has eliminated about 300 small accounts, and
has kept the big producers, all of whom are now
handled by Black.

The Rule of 80/20 is a valuable guide


to action, but it clearly has its limits.
Now that sales manager Blue has the hang of
this Pareto principle, he feels that he can make
one more move. This is especially so in light of
Black's inability to handle his 100 accounts
effectively. The remaining 100 accounts still
follow the 80/20 Rule. Blue has time on his
hands, having eliminated most of the sales
department. He has plenty of time to handle the
21 accounts covered by Black that now produce
76 percent of Black's sales.
Goodbye, Black.

The Band Wagon


Now consider for a moment that the sales
manager is not the only person in a position to
carry the 80/20 Rule to its logical conclusion.
As a matter of fact, in the face of Blue's actions,
the manufacturing executives and financial
executives of Blue's company are probably
enraged by now. Total sales have gone down,
down, down. So has profitability. Manufacturing
costs have gone up, up, up. Too bad.
Once the financial department sees what is
happening, they too feel that they can play the
game. The financial department, having analyzed
account profitability, finds that about 20 percent
of the accounts that remain produce 80 percent
of the remaining profit. Taking the same tack as

that taken by the sales department, they lobby


for the elimination of the accounts that account
for only 20 percent of the profitability"marginal"
accounts at best.
We have now reduced the total number of
accounts in a few easy steps by about 80 percent.
The remaining few accounts still follow the 80/20
Rule, but it would require enormous fortitude to
make the final reduction to a single account.
Needless to say, manufacturing management
can take a similar approach regarding the number
of grades manufactured, the number of models
to produce, or the number of products to make.
In every case the end result is unity: one grade,
one product, one model, one customer, one
salesman, one plant. One can observe some reallife, real-time models in the Soviet Union. One
size fits all; one model fits all.
The Pareto principle is based upon empirical
observation. It was not originally intended to be
a rule for action. Less than judicious application
of the principle as a rule for action can, and
does, result in reductio ad absurdum.

Static or Dynamic?
There is a second dimension to the Pareto
principle which needs to be understood. A Pareto
diagram showing the distribution of sales dollars,
or number of accounts, or whatever, is like a
photograph. It is correct at the time the count
was undertaken, at the time the analysis was
made, but it is not necessarily true over time.
The Pareto principle is static. It tells nothing
about either the past or the future.
Once again, an example may clarify this second
dimension. Back to Black, Green, and White. At
the time Black's territory was analyzed by sales
manager Blue, one of the many accounts that
were producing only 20 percent of Black's sales
was a small company by the name of the Haloid
Company. It's better known these days as Xerox
Corporation. Then there was the small firm in
Ms. Green's territory producing business accounting machines. It was located in one of the
least productive counties in Green's territory.
She was forced to stop calling on this company
in order to concentrate on the larger prospects
in other counties. The company she stopped
calling on was International Business Machines.
White had been trying to break into a little
company in Texas called Texas Instruments with
a new product for which sales dollars were still

39

THE JOURNAL OF SERVICES MARKETING

miniscule. However, Blue's direction was to


concentrate on the top six products in the line.
It takes a series of photographs over time to
show how foolhardy Blue's strategies would prove
to be. Unfortunately, there is no comparable
principle or rule of action to counter the Pareto
principle as a guide to action.

Using the Pareto Principle


Without Abusing It

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The rule of 80/20 is in fact a valuable guide

40

to action, but it clearly has its limits. Concentrate


on the 20 percent that are important today, of
course. However, one can't disregard the 80
percent, some of which may be found among
the important 20 percent tomorrow. Even Fortune
500 companies differ from year to year. Some
are dropped from the list, some are added. For
those that continue on the list, rankings vary
considerably from year to year and from decade
to decade. That's a good thing to keep in mind
when you're thinking of taking action based on
the Pareto Principle.

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