A Pareto chart is a tool used by businesses to make decisions that maximize profits by using resources efficiently. It incorporates a bar graph and line graph to identify the most common complaints and their frequency. By applying the 80/20 rule, companies can address just 20% of issues to eliminate 80% of customer complaints and direct resources effectively.
A Pareto chart is a quality control tool used by businesses and other organizations. These diagrams help companies make decisions that allow them to get the greatest possible benefit from the least amount of resources or effort. By using resources efficiently, the company can contain costs and maximize profits.
The Pareto chart, or Pareto diagram, is named after the Italian economist Vilfredo Pareto. During the 19th century, Pareto postulated that 20% of the population owns 80% of the wealth within a nation. This concept became known as the Pareto principle or 80/20 rule. Over time, people in other fields began applying the 80/20 rule to other disciplines. For example, business experts might assume that 80% of customer complaints come from 20% of a company’s customer base.
By building a Pareto diagram, the company can choose from options that will help it better improve the company. These charts incorporate both a standard bar graph and a line graph. For a basic example, consider a company trying to improve customer retention by addressing consumer complaints. Along the bottom axis of the Pareto chart, the firm will list all of the standard complaints it receives. The most common complaint, or the one reported by the most customers, would be listed first, followed by the remaining complaints in order of frequency.
Along the left vertical axis of the bar graph, users will list numbers representing the frequency of these complaints. The Pareto Chart also requires a vertical axis to the right of the graph, which represents the percentage of total complaints each issue represents. The bar graph should be created so that each bar shows the frequency of each complaint, with the bars shown in decreasing height from left to right.
Next, a dot is placed above each problem. This point represents the percentage of total complaints that this issue represents. By connecting all the dots, users can see which issues account for the largest percentage of consumer issues.
By examining a completed Pareto chart, users can quickly identify which problems can be addressed using the 80/20 rule. In many cases, addressing just 20% of issues will eliminate 80% of customer complaints. This helps the company determine where to direct its resources to get the most value for money. It is also the best way to build customer loyalty and minimize claims handling costs based on limited time and resources.
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