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The Pareto Principle

The Pareto Principle (also known as the 80-20 rule) states that, for many events, roughly 80% of the effects come from 20% of the causes.

In 1906 Vilfredo Pareto observed that 80% of the land in Italy was owned by 20% of the population; he developed the principle by observing that 20% of the pea pods in his garden contained 80% of the peas.

It has since become a common rule of thumb in business; e.g., "80% of your sales come from 20% of your clients."

It is certainly true that all consumers are not equally valuable to a business. New data show that for most business categories, one-third of the buyers account for at least two-thirds of the volume.

This ‘high profit’ segment often delivers six to ten times as much profit as the low-profit segment.

Moreover they are critical not only because of their profit contribution, but also because of their relatively small number.