Pareto Analysis – 80/20 Rule

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Pareto Analysis, which is more popular with its nickname i.e. 80/20 rule is a standard analysis option in BI tools today. For example Cognos has a menu option called “Apply 80/20 suppression”. This feature re-calculates the data as per Pareto principle and groups insignificant data into “Others” category.

Pareto’s principle is a simple and powerful method for aiding decision making and can be applied to almost any industry or business function.

Primary assumption of Pareto analysis states that 80% of causes are due to 20% of the problems. Focusing and steadily attacking 20% of the problems in organized manner will yield better results in short as well as long term.

From a BI context, we can look at application of Pareto Analysis rule as

  • 80% of Sales Revenue comes from Top 20% of Customers
  • 80% of Expenses are withing Top 20% of categories
  • 80% of Vendor Spend comes from Top 20% of Vendors
  • 80% of Customer Complaints are due to 20% of Bugs
  • 80% of website visitors are interested in 20% of content

A simple graphical interface helps in identifying the boundary for identifying the 80 and 20 percents. The chart works with a single dimension and a single measure. The measure is sorted and plotted twice along both axes of the chart. The secondary axes represents the measure in cumulative percentage of total and primary axes represents the measure as a whole number.

PAreto

In the example above, it is very intuitive to see that two opinions from focus group matter the most to sales team to address than others.

Simple excel based tutorial to create a Pareto Chart can be found here.