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How Useful Is the Pareto Principle?

How Useful Is the Pareto Principle?

The Pareto Principle states that 80% of the results from any series of actions are caused by 20% of the actions themselves. In other words, most of the results we get are because of a small minority of our actions. The rest are either wasted or produce little of value. This sounds like a useful observation. However, before you decide the Pareto Principle is true and can be used to guide your actions, I want to ask two important questions.

  1. Can you identify which actions make up the useful 20%? And can you do so in advance?
  2. Does this useful 20% always contain more or less the same actions?

Let’s take the first question. It’s easy to feel intuitively that most results arise from a small group of actions. The Pareto Principle feels immediately valid. It also feels like a practical tool. Identify the “magic 20%” of actions and you can more or less dispense with the other 80% without much impact on your results. What a marvelous saving of time and effort.

Of course, this only works if you can reliably distinguish the 20% of actions (or people, or events) that produce that disproportionate amount of benefits. It also assumes every result comes from a single, identifiable action — or at least a small, obviously linked group of them.

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But is this true? Don’t some results rely on the interaction of large numbers of events, choices, actions and decisions? Can we know which count and which don’t? What if we dropped some, only to find later they were essential in some way? Maybe they only produce good results in combination? Cutting seemingly unnecessary actions because they don’t obviously fit into the “magic 20%” might turn out to be a poor idea.

The Pareto Principle is perhaps most often applied to sales. Suppose you could reliably identify the 20% of sales calls that produced 80% of the orders you took this week. How much might the success of those calls rely on the market intelligence, knowledge and simple practice you gained by making the other 80%? Could you miss out all the rest, or even a significant number of them? That would include new customers being encouraged to place larger orders, prospects and old customers who might be won back from a competitor.

My second concern is this: is it always the same 20%?

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Let’s stick with the sales calls. This week, 20% of your calls produce 80% of your sales. Pareto rules! Next week, you need to sell just as much. Will you visit the same 20% of customers and receive the same orders?
Surely that’s unlikely. They only just placed an order. Most, maybe all, need to use up that order before buying again. Fine. You just need to find another 20%. But how? Everyone else was in the “unproductive” 80% last week? But if Pareto works, at the end of the next week you’ll once again find 80% of orders came from a new 20% of calls.

What’s going on? My guess is the Pareto Principle distinguishes groups you can only find after the event, once you can see what worked and what didn’t. The membership of the “magic 20%” of people or actions shifts each time. Wait long enough and every one will sometime be part of that 20% group.

If that’s so, the Principle is almost worthless as a guide to future action, which is how it’s most often used. There may be some actions or people (20% again? Who knows?) that figure so rarely in the “magic group” they could be removed without loss. There may be some regular members of that group that could be identified and given more focus and investment. Either way, what’s needed is time, careful observation and recording over many occasions, good records and much patience and reflection. None of these are actions or qualities much associated with today’s frenetic organizational pace.

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I’m not saying Pareto is wrong. I don’t know. I’m not sure anyone has ever done the lengthy and extensive research needed to find out. I’m merely suggesting it’s neither the universally applicable principle, nor the simple measure, nor the practical guide to decisions we’ve been asked to believe it is for so long.

To sum up:

I think the Pareto Principle has great intuitive attractiveness — which says nothing about whether or not it works, nor how it works (if it does). However, these questions remain unresolved:

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  1. How do you know which 20% is producing the results? Can you even find out at a time when the knowledge might be useful? I suspect you can usually only find the answer — if there is one — after the event. And if that’s so, it leads me to a second question.
  2. Is it always the same 20%? If it’s not (and I suspect it isn’t), over time maybe the whole 100% will be in that magic 20% group sometime. And if that’s true, the Principle applies only to a specific occasion (if it applies at all).

If any of my concerns is valid, the whole idea becomes worthless as a guide to future action or allocating resources (which is how people try to use it).

Adrian Savage is an Englishman and a retired business executive who lives in Tucson, Arizona. You can read his thoughts most days at The Coyote Within and Slow Leadership, the site for anyone who wants to bring back the fun and satisfaction to management work.

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Last Updated on June 22, 2018

How to Nix Your Credit Card Debt in Less Than 3 Years

How to Nix Your Credit Card Debt in Less Than 3 Years

Debt is never a fun thing to be in. But, there are many actions that you can take that will help you rid yourself of the burden of debt once and for all.

By coming up with a set plan, eliminating your debt can feel much easier than constantly thinking about it.

This post will provide some tips on how you can do this to help you nix your credit card debt in less than 3 years.

Hint: there are ways that are easier than you think.

1. Consider consolidating multiple credit cards if possible

This may not be applicable to you, but if you have multiple cards – it is something to consider. Keeping up with multiple bills is time consuming.

It will depend on the balance you have on each. Consolidate ones you can but do not do it to the point that you get too close to the maximum limit. Also, it is ideal to pick the card with the lower interest rate.

Consider if there are any fees or alternatively, rewards, with transferring a balance to another card. Watch out for fees. Note that some cards offer rewards for transferring a balance to them. This is extra cash that can help go towards paying off your debt.

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Having one or two cards can make nixing your debt much simpler than keeping up with the balance of a bunch of cards. Keeping track of paying the minimum towards a bunch of cards is time consuming. Spend the time to consolidate instead to make the overall process simpler going forward.

My tip: Have one main credit card. Have a second one that you use for necessities – such as groceries or gas – that offers rewards for those purchases (a lot of cards do) and set the second one on auto-pay. You should be able to pay off a smaller amount on auto-pay if it is a necessity. If you think you cannot, then you may need to cut down a lot on expenses.

Why do I suggest doing this? Having one thing set to auto-pay is one less thing to think about. One less thing to waste time on. Same idea with consolidating to one main card. Tracking down too many is a hassle.

2. Try to pay the full balance you spent each month at the very least

You need to pay off the amount you are spending each month when that bill comes in. This is the amount you spent THAT month.

Do not let the debt keep accruing while you work on paying any unpaid debt that has accrued. It will become a never-ending battle. Try as best as you can to be current on paying for each month’s expenses when that month’s bill comes out.

If this is a strain, consider why. You may need to cut expenses. Or you may need to consider other cards. Or look at where this money is going.

3. Pay extra when you can – every small amount counts

This cannot be emphasized enough. If you are looking at a lot of credit card debt, it can look daunting, but each extra amount that you can put towards the debt will really add up – no matter how small it is.

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It does not just reduce the principal amount that you have left to pay off, but it reduces the amount that is collecting interest. You will always save money with that reduced interest.

4. Create a plan on how to pay extra

Back to the main point, having this plan is giving you one less thing to think about.

This plan should be a plan that works for you. If it does not work for you, your spending habits, and your views on debt, then it will not be an effective plan.

For instance, if a set plan of an extra $50 (or another amount that you know you can afford) works for you, then do that. Set that aside every month and pay that extra amount. Treat it like a bill. Choose an amount that works for you and pay it like clockwork as though it was a bill you had to pay each month.

Little amounts will not nix it entirely, but they will help tackle it and having a set plan can make it less of a chore. Creating a new plan of how much to put towards it each month is an unnecessary added stress.

5. Cut out costs for services you do not use

If you are signed up for subscriptions that you do not use because of some free trial or for some other reason, cut it out. Your overall financial position will look better.

In turn, that will make cutting your credit card debt easier. Look at your statements to find these expenses. If you do not use them, you may forget you are paying some unnecessary amount each month. Cutting it out can really add up in savings that you can put towards other needed expenses.

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6. Get aggressive about it

Consider these points:

Depending on the interest and the level of debt, you may need to give up a few indulgences. For example, instead of ordering delivery or going out to eat, cook at home. Everything adds up.

Other things may be more of a sacrifice. It may be a trip you wanted to go on, or a daily latte habit you’ve picked up. In these instances, consider how important it is to you and if it’s worth the sacrifice. And if it is a costly expense, think whether you can wait to indulge.

Cutting an extravagant expense can really help make a dent in your overall debt. Try not to add to debt when you are trying to pay it off. It will be a never-ending battle. Make it less of a battle with these tips and it will feel easier.

Bottom line: Do what you can to make this process easier for you. Implement steps that do this. It takes time now, but will help overall. Also, keep track of your spending and paying down of your debts. Which is the next point.

7. Reevaluate your progress at set intervals

Doing a regular check-in can help you see your efforts pay off or maybe indicate that you need to give this a bit more effort. If you check every 3-6 months, it will not feel so much like a chore or feel so daunting.

By doing this, you will be able to better understand your progress and perhaps readjust your plan. Bonus: if you see it pay off, it will feel great to do this check-in. You will get there.

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Finally (and most importantly)…

8. Keep trying

Do not get discouraged. Pushing it off will make it worse. Just keep trying.

Once your debt becomes lower, each monthly payment will reduce the balance more. Why? You are paying less towards interest. It will be a snowball effect eventually and it will become much easier to manage. Just get to that point. And know once you do, it will feel easier and motivating.

Start knocking out your debt today

The best way to eliminate debt is to get started right away. Begin by implementing the above steps and watch your debt just melt away. Try out some of the above strategies and see what works best for you. Soon you’ll be on your way to a debt free life.

Featured photo credit: Pexels via pexels.com

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