* Please contact me with examples of the 95:5 rule in practice in your creative enterprise. Superfans might be just 1% of your customer base but they can account for more than 90% of your income and profits. 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). In practice, the imbalance or skewing is even more pronounced than 80:20. The present paper is a critique of the Pareto principle, one of the building blocks of traditional welfare economics as well as an influential principle in. 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 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. Referred to as the Pareto Principle after Italian economist Vilfredo Pareto, the 80/20 rule finds that 80 of the outcomes or results in a given situation stem from only 20 of what went into. In terms of business, it’s crucial to identify the ‘important few’ from the ‘trivial many’ – and then pay special attention to them. Indeed there is a disproportionality, with the ‘important few’ (20% or so) having more effect than the all the rest put together.
The point is that not all thing are equal. (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.) 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.
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.
The beginning point for this development is the introduction of a new function describing individual preferences, closely related to willingness-to-pay, termed the benefit function. The Pareto Principle, also known as the “80:20 Rule”, states that 80% of results flow from 20% of causes. This paper develops several optimization principles relating the fundamental concepts of Pareto efficiency and competitive equilibria.
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