Let’s say you run a restaurant business and you want to determine the reasons for customers’ complaints, which cost you most of the money/customers.
Pareto analysis essentially gives you a clear understanding of what are the main reasons that cause loss of customers/money in your business. The chart was basically named after Vilfredo Pareto the founder of 80/20 law. As the chart shows roughly which are 20% of the reasons that cause you the 80% loss, you proceed to address those reasons without wasting time in dealing with the other trivial reasons (roughly 80% are trivial). The 80/20 rule is not to be taken as an absolute. It should be “The significant few reasons that provide most results, rather than the insignificant few that provide the much more lesser input”.
With the above example in mind, these are the steps of Pareto analysis:
1) Determine the reasons for complaints.
2) List for every reason the occurrence (in a pre-set timeframe).
3) Calculate the percentage of each reason.
4) Calculate the cumulative percentage for each reason.
As you can see from the graph above, the significant reasons for complaints are: “Overpriced”, “Wait Time” and “Not clean”. These three reasons are the only ones you should be focusing on, to remove most of the complaints of your customers. The rest are simply a waste of time. When you address the three reasons, only then you can move to other reasons.
You can use the Pareto analysis in anything you can think of. It works like a charm. You work and focus on the significant few, you discard temporarily the insignificant many. Identifying and focusing on the 20%(instead of the 80%) helps you tremendously in allocating your time effectively and removes the trivial tasks that cause you much of the stress.