The 80-20 rule (Pareto rule) is a rule of thumb that states that 80% of outcomes can be attributed to 20% of all causes for a given event. In business, the 80-20 is often used to point out that 80% of a company’s revenue is generated by 20% of its total customers. Therefore, the rule is used to help managers identify and determine which operating factors are most important and should receive the most attention, based on an efficient use of resources. The 80-20 rule is also known as the Pareto principle, the principle of factor sparsity and the law of the vital few. At its core, the 80-20 rule is a statistical distribution of data that says that 80% of a specific event can be explained by 20% of the total observations. The 80-20 rule is most commonly used for analyzing sales and marketing. If a company can identify its highest-spending customers, it can effectively market to them in order to retain existing customers and acquire similar consumers. Therefore, companies should dissect their revenues and understand who makes up their top 20% of customers.
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