Using Pareto’s Principle to Maximize Sales

“What gets measured gets managed.” – Peter Drucker

One of my favourite chapters from The 4-Hour Workweek is a passage describing Vilfredo Pareto’s discovery. An Italian economist, Vilfredo Pareto, in the early 20th century observed that 80% of the land in Italy was owned by 20% of the population. More interestingly, he found this distribution to be inherently common in nature. This observation is now known as the Pareto’s Principle.

The principle has the potential to save businesses tons of time and guess work when, for example, reordering inventory. A business owner could use it as a guide to allocate capital towards the 20% of products that generate 80% of the profit. In other words, the Pareto’s Principle can be used to seek maximum outcome from minimal effort.

I wrote a script to determine the Pareto distribution for a sales forecast system. A CRON job was employed to periodically funnel the 20% of products generating most of the profit – the end result was a report indicating a list of goods that the business must keep in stock in order to maximize sales. Here is a simplified version of the script you can use in your own projects to build similar applications:

Script for Pareto's Principle

The Pareto Principle could be useful for any number of businesses. For example, a telecommunication company could use this algorithm to determine the top 20% of subscribers that generate 80% of the headaches, etc.

Some other interesting applications of the Pareto Principle can be found on Wikipedia.

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