The 95:5 Rule (derived from Pareto's '80:20 Rule')

 

The Pareto Principle, also known as the "80:20 Rule", states that 80% of results flow from 20% of causes. So, for example, 80% of sales can come from just 20% of customers; 80% of road accidents occur in just 20% of accident locations; and maybe 80% of headaches are caused by just 20% of your friends.

 

(Wilfredo Pareto, an economist, identified that 80% of the wealth was owned by just 20% of the population.)

 

The point is that not all thing are equal. Indeed there is a disproportionality, with the 'important few' (20% or so) having more effect than the all the rest put together.

 

In terms of business, it's crucial to identify the 'important few' from the 'trivial many' - and then pay special attention to them. Maybe the top 20% of customers that generate 80% of profits, maybe the top 20% of stock items that are responsible for 80% of sales.

 

In practice, however, the imbalance or skewing is even more pronounced than 80:20. I reckon it's often more like the top 5% of causes (customers, items, investments etc) that can be responsible for 95% or more of effects (profits, sales, dividends etc). That's why I call it the 95:5 Rule.