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How you can Improve your Income with the Working Power of the Pareto Principle

Updated on November 26, 2011

You can maximise your Income generation potential (or at least stay within the range of profit) in any money-making activity you are engaged in, no matter how small or large, using the Pareto principle which ensures that you invest the smallest time, energy and resources; to get maximum benefit in terms of profit.

The Pareto Principle or the 80-20 rule (also referred to as, "the law of the vital few" or "the principle of factor sparsity") states that; For many events, roughly 80% of the Effects come from 20% of the Causes.

The law was suggested by Joseph M. Juran who gave credit to Vilfred Pareto for postulating in 1906 that, 80% of the land in Italy was owned by 20% of the population and 20% of the pea pods in his garden were responsible for producing 80% of the entire peas.

But how can this law be applicable to your everyday business activities and Income Generation? This will be simplified in its impact on the Italian society and application in Business and Politics.

A Pie Chart illustration of The Pareto Principle

The Pareto Principle: 20% Cause 80% Effect.
The Pareto Principle: 20% Cause 80% Effect.

The Pareto Principle Mimicry in the Italian Society

One common Phenomenon in buying and selling process in Italy, is the popping up of Saldi (on sale) at specific periods of the year. Sometimes the rate of discount could be so outrageous that you are left to wonder if traders are not trading at a loss. For example, an Item with an initial cost prize of €100 could sell for just €20. You see consumers waiting for products to be put on discount before stocking their homes. You are left to wonder if the people are not trading at a loss.

A study of the 80-20 Rule revealed how a people have mastered a trading tactic that keeps them within profit margin while they give out some discounts. This Formula is also applicable to the calculation of daily output in production process. Here, Entrepreneurs can use this rule as a Buffer in situations that would have led to Wastage or loss.

Get a copy of your own 80/20 principle and unlock the secret of achieving more, working less.

Application to Business

The principle can create an effective and conducive business environment. It can also help to manage time and utilise the most effective work force for maximum output. The Business application of the principle is as summarised below,

• 80% Profit from 20% of your Customers

• 80% Complains from 20% Customers

• 80% Profit from 20% of the time invested

• 80% Profit from 20% of your products

• 80% production from 20% of your work force.

How does this Interprets if you are a part-time worker like an online publisher? It will help to maximise your profit from only a few part of your activities. That is, you could use the smallest time to research and write the best content possible to generate maximum profit.

Taxing policy and the 80/20 Rule

The Concept of "advantageous few" (the 20% of the population who controlled 80% of the wealth) and the "trivial many" (the other 80% of the population) has also found favour in recent politics of Taxing System.

The Administration of president Obama of the United State of America, believe that the Tax Burden on the middle class is already enormous that those who has plenty (the rich and wealthy) should be made to pay more. Coincidentally, they make up a minute portion of the society. The president may not be conscious of the principle, but it shows that, there is a reasonable Logic that is applicable to different facets.

Application to locally made products in developing countries

Pareto Principle is also applicable to the production process of making a locally consumed product in Nigeria, called Foofoo. There is a Nigerian Postulation thus, "using 50,000 Naira to purchase Cassava; two employees for making, processing and sales with 10,000 Naira salary for each, mathematical model (for real life situation) will show that, input should be of value of 15-25% and output gain of 75% to 80%. Thus bringing us to the conclusion that, the Model is effective."

He further stated that, in applying this rule or principle; you should put in mind that, for you to succeed greatly, you must always focus your time and energy on the few activities i.e the 20% of the activities. Your ability to keep this focus will eventually move you up to advantages and progress in any business of your choice.

Polls on the use of the Pareto Principle to improve your Income

Do you think the use of the Pareto principle can actually improved the profit and management of your Business?

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    • James Agbogun profile image

      James Agbogun 5 years ago

      You are right .josh. One thing is to study the principle and understand it. The other is to put it into actual Practice. Thanks!

    • James Agbogun profile image

      James Agbogun 5 years ago

      hungrymouse, It's nice to see you bring intelligent approach to this Hub. Your comment is enriching and also capable of waking up Search Engines. Thanks!

    • .josh. profile image

      .josh. 5 years ago

      I've come across this in literature before, but it's nice to see someone discussing it on HP. I absolutely believe there's something to the Pareto Principle, though sometimes admittedly find it difficult to follow.

      Great hub!

    • hungrymouse profile image

      hungrymouse 5 years ago from North America

      I totally agree with 80% of this article and 20% is new information I hadn't considered before. I didn't know the rule by name but I do know it and after reading this article I have decided to take it into account in everything I do.

      Generally, I am not in favour of statistical approaches because of the fact they are generalizations which are not particulary valuable in specific contexts.

      However, this statistical generalization is an exception to that rule and it makes sense to incorporate it into a higher level strategy simply for the fact it produces rapid and effective figures to base further analysis in the most obvious areas and therfore targetting any refinements where they matter most.

      Thanks again

    • James Agbogun profile image

      James Agbogun 6 years ago

      Hello Frugalfamily, You are very right! Let's hope a lot of people get to know and use this principle to strategize on better Business Practice. Am happy you took the time to stop by. Thanks!

    • frugalfamily profile image

      Brenda Trott, M.Ed 6 years ago from Houston, TX

      Hi James, I didn't know this principle had a name. It is very valid. Many people just focus on the 80 portion of the rule. If you really look to see what 20% of your effort is gaining you the most profit, then you can actually double your results!

    • James Agbogun profile image

      James Agbogun 6 years ago

      Thanks Scribenet. The 80/20 Rule is such a fascinating principle that I thought could be useful to everyone. Appreciate your comment!

    • Scribenet profile image

      Scribenet 6 years ago from Ontario, Canada

      This is an interesting principle which I learned years ago, just forgot it's name. Thank you for refreshing my memory and reminding me how universal and useful it is! Voted up, awesome and useful!

    • James Agbogun profile image

      James Agbogun 6 years ago

      Hello rorshak sobchak, Such a very nice comment. Love it! Welcome to Hubpages!

    • profile image

      rorshak sobchak 6 years ago

      Awesome principle. You made a really great Hub out of it! Keep up the great work James.

      rorshak sobchak

    • James Agbogun profile image

      James Agbogun 6 years ago

      Thanks Lady_E! The Pareto 80/20 Rule is such a fascinating principle that I found it an attractive subject to write on. It's always a delight when you are here.

    • Lady_E profile image

      Elena 6 years ago from London, UK

      First time I have heard of Pareto. Thanks for enlightening me. :)

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