Channel News

Pareto's Principle (The 80-20 Rule)

Thursday, March 09, 2006

Author: Cam Wayland
In 1906, Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal distribution of wealth in his country, observing that twenty percent of the people owned eighty percent of the wealth.

After Pareto made his observation and created his formula, many others observed similar phenomena in their own areas of expertise. Quality Management pioneer, Dr. Joseph Juran, working in the US in the 1930's and 40's described a universal principle he called the "vital few and trivial many". However, a lack of precision on Juran's part made it appear that he was applying Pareto's observations about economics to a broader body of work. As a result, the name Pareto's Principle, or Pareto's Law as it is sometimes called, stuck (probably because it sounded better than Juran's Principle).

While it may be misnamed, Pareto's Principle, also known as the 80/20 Rule, can be a very effective tool to help you manage yourself and the channel.

What It Means

The 80/20 Rule means that, in any given activity, a few (20 percent) are vital and many (80 percent) are trivial. In Pareto's case it meant 20 percent of the people owned 80 percent of the wealth. In Juran's initial work, he identified 20 percent of the defects causing 80 percent of the problems. Project Managers know that 20 percent of the work (the first 10 percent and the last 10 percent) consume 80 percent of your time and resources. You can apply the 80/20 Rule to almost anything, from the science of management to the physical world.

Within the context of a channel program you can look at the channel partners that are generating the sales results and you will find that the same principle applies. The challenge is how you manage your external partners to ensure you “don’t have all of your eggs in one basket”, hence increasing your risk, while still managing your internal and program resources wisely.

You know 80 percent of your channel sales will come from 20 percent of your channel partners. However 20 percent of your channel partners will cause 80 percent of your problems etc. It works both ways.

How It Can Help You

The value of the Pareto Principle for a channel manager is that it reminds you to focus your resources on the 20 percent of the channel partners that matter – those 20 percent that produce 80 percent of your results. Identify and focus on these partners. If something in your schedule or program has to slip, if something isn't going to get done, make sure it's not going to affect that 20 percent.

A word of caution however - focusing entirely on the top 20% is not always practical in the real world. Business environments and circumstances change over time, and you should not overlook those partners that have the potential to be in the top 20%. This means that, as your whole partner base grows and becomes more diverse, new partners will enter the top 20%, and some partners may drop out, therefore eliminating some of the risk of the Pareto Principle.

Helping a good partner with potential become better is a better use of your time and resources than helping a great one become terrific. Apply the Pareto Principle to manage the channel, but use it wisely. Being effective is about working smart, not hard, and that means focussing on the right things with the right partners.

Best Practice Channel Management Ideas Using the Pareto Principle

  • Define what the characteristics of the 20% should be i.e. What makes a key account, is it the most profitable, the largest, most potential, etc
  • Review your partner’s results and rank them monthly, know who are the 20% and the 80%, find out why and re-prioritise at least quarterly
  • Ensure you are measuring all of the required information to get the full picture, not just the good news or sales results
  • Ensure your channel managers are not only focusing on the top 20% by implementing KPI’s as part of their incentive scheme to groom those partners with potential
  • Align your channel support programs in the same manner, 80% of your resources should focus on 20% of the channel to provide more “bang for your buck”
  • Implement a quarterly review mechanism to professionally remove those partners that are not supporting you and have no potential to move into the 20%, otherwise you will not have the required resources to grow your channel profitably

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