The Pareto Principle in Hospitality

August 13, 2019

How a theory that is usually applied in economics is applicable in hospitality?

In 1905, an Italian economist Vilfredo Pareto introduced a very insightful development. He discovered that only 20% of Italians were responsible for 80% of the nation’s wealth. Later, he found it to be true in France, Germany, and in the Netherlands. But it wasn’t about the commonwealth of a nation. He proceeded to discover in his own garden, 20% of the peapods seemed to be responsible for yielding 80% of the peas.

This widespread principle led to the term that we now know as the Pareto Distribution Principle or better coined as the 80/20 rule. Simply stated, 80% of your effects come from 20% of your cause. Here are a few examples for some clarity. If you look inside your closet, you would notice that 80% of what you wear comes from 20% of your entire wardrobe. Likewise, 80% of your time in public transport will only take you to 20% of the places in town you currently live in.

Another term related to the Pareto Principle is The ABC Analysis. In this diagram, you can segregate the most important items into three groups. Group A (most important products/items) would be 20% that take up 80% of your cost. Group B is established by taking the next 30% of the items that take up 15% of your cost. Finally, Group C (being the least important product/item) is the remaining 50% that take up 5% of your cost. These three groups provide an accurate analysis of what should you focus on in the long run.

Are there any downsides to the ABC analysis?

There are two main limitations of an ABC analysis. It fails to pinpoint the low-cost items which may impact any future activities that a business would like to continue. It also fails to differentiate the items that are easily available on the market to the ones that are less than available or not available at all.

So how does the 80/20 rule apply in Hospitality?

Sales Efforts:

80% of your sales will only come from the 20% menu. Finding ways to increase sales by focusing on the items that are not used often is the challenge.

Menu Development:

80% of your cocktail menu will only come from 20% of the items you have in your possession. Preventing waste by finding innovative ways of creating a cocktail list and use more items that are in your facility can be tricky.

Staff Evaluation:

80% of the results accomplished in your restaurant comes from 20% of your employment. It is up to you to recognize what works for them and encourage your other workers to follow the same work ethic.

Marketing Strategy:

80% of your engagement on social media will only come from 20% of your post. Creative ways to increase conversation with potential guests and timing your social media post to get the most interactions.

Inventory Management:

80% of your inventory will come from only 20% of your resources. How to use the ABC analysis in your grid to determine the items that need most of your attention and what items should receive less.

The 80/20 rule is significant. It simplifies complex statistical data to give you a step forward in the right direction. Keeping things simple will encourage you to become more confident in the crucial decision being made in your restaurant or bar. Whether it be purchasing power or managerial decisions. With this guide, you will discover the essentials to become a successful entrepreneur in the hospitality industry.

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