80/20 Sales and Marketing
CHAPTER 1
How 80/20 Works and Why
How 80/20 Works and Why
A few years ago I held a seminar in Chicago called “The 80/20 Seminar for Direct Marketing.” To my knowledge it was the first such conference or seminar. It cost $3,000 to attend and I
had about 80 people in the room. All of them ran businesses of one kind or another, most of them online. To illustrate the all-pervasive nature of 80/20, I said, “Everybody stand up if you have shoes on.”
Everyone stood. I said, “If you own fewer than 4 pairs of shoes, please sit down.” A bunch of people sat down, and about 50 were still standing.
“If you own fewer than 8 pairs of shoes, sit down.” More people sat down, about 30 left.
“If you own fewer than 16 pairs of shoes, sit down.” Thirteen people, 9 of them women, still standing.
“32 pairs of shoes.”
Three women standing.
I smiled. “Don’t be embarrassed, ladies. Just tell the truth,
cuz I’m illustrating a principle here. How many of you have
more than 64 pairs of shoes?”
Two sit down. One left standing. She cringes with
embarrassment.
“How many shoes do you have?”
“Umm, about 80.”
“Thank you so much. You can sit down now. Give this woman
a hand!”
Everyone clapped. “20 percent of the people own 80 percent
of the shoes. Can you see that?” I said. All nodded in
agreement.
“Everybody stand up again—everyone who owns at least one
domain name.” They were all marketers, so it was pretty much
everybody.
“Sit down if you own fewer than 10.”
Half the room sits down.
“Fifty.”
Half again sits down. We’ve got maybe 20 still standing.
“Two hundred.”
A bunch more sit down, 10 standing.
“Five hundred.”
Five people left. I keep going—1,000, 2,000, 5,000.
At 5,000 domain names, I’ve got two people left. At 10,000,
one guy sits down.
Mickie Kennedy from Baltimore, one of my best customers, is
the only one left standing. “How many domain names do you
own?”
“Twelve thousand.”
Mickie was a “Domainer,” the domain-name equivalent of
flipping real estate. He owned entire portfolios of domain
names, some selling for tens of thousands of dollars.
20 percent of the people owned 80 percent of the domain
names, and in a room of 80 people, one guy owned nearly
half.
Almost everything is like that.
Not absolutely everything—but most things. Shoes, domain
names, Bible verses, trips to Vegas, pearl necklaces,
consumption of dinner napkins, tubes of lipstick. Rabbit
populations, streams and rivers, size of cities in southern
Argentina, passengers on London’s underground “Tube” trains.
Net incomes, profit margins, software development timelines.
Foreclosures, trips to the tavern, and trips to the emergency
room. Diameters of stars and planets, and the size of craters on
the moon.
Why rattle off this scattered list of things in a business book?
Because if you can see 80/20 at work in this list, you can
identify it in any part of your business. Once you’ve learned to
recognize it, you can’t not see it. Look at the tree outside your
window: 80 percent of the sap travels through 20 percent of
the branches.
If you have 30 customers, you’re tempted to treat them all
the same. Well they’re really not the same at all. Odds are, 20
percent of your business comes from just one of them. The size
of those customers really looks like this, in Figure 1-1.
All these things obey the 80/20 principle. That’s because
80/20 isn’t a mere rule of thumb, and it’s not just for business.
It’s a law of nature. John Paul Mendocha observed that 80/20 is
literally the “Invisible Hand” that Adam Smith wrote about in
his landmark book, Wealth of Nations, when Smith made his
case for free-market capitalism in 1776.
Figure 1-1. Customers are notoriously unequal. If you have 30
customers, their capacity to spend money with you looks like
this. The first customer generates 20 percent of your business,
the next two largest give you the next 20 percent, and so on.
The same principle of inequality applies to almost everything in
your business. (Illustration by Danielle Flanagan.)
It’s not the exact number 80/20 that’s the rule; it’s the
principle of positive feedback, which is when behavior is
rewarded so that it produces more of the same behavior.
Sometimes it’s 60/40 or 70/30; sometimes it’s 90/10 or 95/5.
The exact numbers aren’t so important. But it’s always there.
It’s a law that almost nobody ever gets taught in school. In
fact, our current educational system trains most of us to be
blind to it, ignore it when we do see it, and even fight it as our
enemy, instead of embrace it as our friend.
Exceedingly rare is the person who truly understands it in all
its depth, and I discovered a new insight, a new approach that
I’ve never found about 80/20 anywhere else.
Almost nobody reads simple election statistics that “14
percent of the voters turned out at the polls in this election” or
“5 million people donated at least $5 to the election campaign”
and translates it into a vivid, meaningful picture of those
people, all the way from casual interest to rabidly passionate
and addicted.
Few people ever even consider that a tiny minority of the
donors give almost all the money. And that the one million
smallest donors gave less money than the top ten.
Even if you’ve got average math skills, in literally 60 seconds
you’ll be able to predict, with spooky accuracy, that 735 donors
gave that same election campaign more than 10 grand—with a
simple web page you can pull up on your smartphone.
If your job has anything to do with raising money, you better
darn well know that those 400 donors exist, what they look
like, and where to find them.
It might also be useful to know that there were 17 donors
who gave over $250,000.
With some very simple tools that come as a bonus with this
book, you can punch in a few numbers on your phone or
computer in seconds, and make spooky-accurate guesses. How
many gave over $5,000? You’ll know.
At lunch on the back of a napkin, you’ll be able to shuffle
through all kinds of ordinary facts about your business—how
many customers, how many VIP members, how many
shoplifting incidents, the number of people who opened
yesterday’s email. You’ll easily assign dollar figures to all and
instantly know which opportunities are worth pursuing and
which ones waste your time and money.
80/20 101
80/20 says 80 percent of your results come from 20 percent of
your efforts, and 20 percent of your results come from the
other 80 percent.
But that’s barely the tip of the iceberg. The real power in
80/20 is that you can disregard 80 percent of the roads in your
city, only look at the top 20 percent, and the 80/20 rule will still
apply. 80 percent of the 80 percent of traffic is on 20 percent of
the 20 percent of roads.
That means 64 percent of the travelers drive on 4 percent of
the roads. That’s 80/20
2.
Then we do it again: 80 percent of the 80 percent of the 80
percent of the traffic, runs on 20 percent of the 20 percent of
the 20 percent of the roads.
In other words 52 percent of the travelers drive on 0.8
percent of the roads. That’s 80/20
3.
And it just keeps going because 40 percent of the drivers are
driving on 0.2 percent of the roads: 80/20
4. 32 percent take
0.016 percent of the roads. That’s 80/20
5.
80/20 says that if you have 10 rooms in your house, you
spend almost all your time in two or three of them. It says if
you hire 10 salespeople, two will generate 80 percent of the
sales and the other eight will generate only 20 percent of the
sales.
That means that person for person, the two are SIXTEEN
TIMES as effective as the eight. That’s right—a good
salesperson isn’t 50 percent better, he or she is 16X better.
That means there’s huge leverage in 80/20: much to be gained
if you pay attention, much to lose if you don’t.
The Leverage Power of 80/20 Is in the Layers
80/20
1 = 16:1
80/20
2 = 250:1
80/20
3 = 4,000:1
80/20
4 = 65,000:1
80/20
5 = One million to 1
… and so on.
If you’re not a math person, stick with me and I’ll make this
abundantly clear. This is relatively simple and HUGELY
important, because if you want to influence that traffic—say,
sell them something by putting up a billboard—you can
accomplish as much with one billboard on a major expressway
as 100,000 yard signs on residential streets. That’s just a
simple, elementary example of leverage. As the story unfolds,
you’ll discover far more.
You can climb as high as you want, until you run out of roads
or customers or products or people. If you have enough
numbers to run 80/20 five times, your winners are a million
times better than your losers. That’s million-to-one leverage,
and it’s not a joke. It’s reality.
Here’s a perfect example. Consider the wealth of the entire
world—20 percent of the population enjoys 80 percent of the
wealth:
According to the International Monetary Fund, the total
gross domestic product of all 196 countries in the world in
2011 was $79 trillion (refer to Figure 1-2).
Figure 1-2. This graph shows the productivity of all the
world’s countries from least to greatest. Sixty-three percent, or
almost $50 trillion of that $79 trillion, comes from just 10
countries. So 63 percent of ALL wealth is generated by 5
percent of the countries.
Figure 1-3. 80 percent of the world’s wealth is concentrated in
22 countries.
There are 196 countries in the world, and over 63 trillion (80
percent) of those dollars come from just 22 countries. So, as
shown in Figure 1-3 (page 7), 80 percent of the world’s wealth
is concentrated in just 9 percent (196 countries divided by 22)
of the countries.
I want you to notice how the shape of the curve is the same,
whether we’re looking at the whole picture (Figure 1-3), or just
the top 20 percent (Figure 1-4), or just the top 4 percent. As we
move forward, that curve is going to become very useful to you.
Figure 1-4. Zooming in, we see that $15 trillion, or 19 percent
of the total $79 trillion, comes from one country, the United
States. So 19 percent of world wealth is generated by 0.5
percent of the countries. (REF World Economic Outlook
Database, October 2012, International Monetary Fund.
Accessed on October 10, 2012. Graphics by Lorena Ybarra.)
Now consider the top 10 wealthiest people in the world. I
took this from the Forbes 400 list, from Forbes magazine 2011.
I lumped members of families together (all the Waltons are
lumped together, for example):
1. Walmart—Four Walton children $87B
2. Microsoft—Gates & Ballmer $72.9B
3. Koch Brothers—Charles & David $50B
4. Berkshire Hathaway—Warren Buffett $39B
5. Google—Sergey Brin & Larry Page $33.4B
6. Soros Fund Mgt—George Soros $22B
7. Las Vegas Sands—Sheldon Adelson $21.5B
8. Bloomberg—Michael Bloomberg $19.5B
9. Amazon—Jeff Bezos $19.1B
10. Facebook—Mark Zuckerberg $17.5B
The total is 381.9 billion, and the top three own 55 percent of
it.
80/20 is true of the world’s seven billion people—and it’s still
pretty much true of the top 10 wealthiest people. The 80/20
pattern is exactly the same whether we’re looking at the
world’s seven billion people, the Forbes 400, or the 10 richest
people in the world.
Best of all, 80/20 and 80/20
2 are true of almost anything you
can measure in a business:
• Sources of incoming phone calls
• Effectiveness of salespeople
• Sales to customers
• Physical location of customers
• Popularity of products
• Types of product defects
• Problem employees
• Customer service problems
• Sources of conflict
• Shoplifters
• Activity patterns in a 24-hour day, or a week or month
• Performance of distributors, affiliates, and channel
partners
• Sources of web traffic
• Advertising waste
• Advertising Effectiveness
• Productivity of web pages
• Reasons customers buy
That means every one of these things is a source of leverage.
It means that each has multiple layers of leverage that you can
obtain by “zooming in”—80/20
2 (250:1) and 80/20
3 (4000:1). It
means you can combine many of these factors together and cut
huge amounts of waste out of your day and your budgets.
As we dive into this material, I’ll give you a software tool that
makes eerily accurate predictions and “sees around the corner”
in ways that will mystify your friends and colleagues.
Everybody’s Counting the Wrong Stuff
Did you ever take a test in high school and listen to the teacher
explain the results of the test? “The average was 77, the low
was 41, and the high was 99.” Sometimes my teachers would
draw a bell curve on the board, like the one in Figure 1-5.
But if you’re a results-oriented person, the bell curve almost
never tells you what you really want to know or need to know.
Let me explain.
One hundred students took a science test. The average was
77. The 77 is important to the teacher and the school, but it’s
not all that important to anybody else! If you took it and got an
87, great, you know you were above average. But let’s say you
want to hire one kid to do science experiments. You want to
know a) which kid is the best at science, and b) how good is he,
really?
Figure 1-5. Bell curves tell you how many people got a certain
grade. “12 students scored between 80 and 89 on the test.”
Figure 1-6. The 80/20 Power Curve.
If you’re trying to get something done, if you care about
achieving results, there’s a much better way to see this class
and everyone who took the test. Let’s put the kids on the 80/20
Power Curve (which you can access www.8020curve.com), in
Figure 1-6.
You have lived in and around the 80/20 Power Curve every
day of your life. But it hasn’t been until now that you actually
saw what it looked like. Almost everything that matters to you
in your life follows this curve.
The Power Curve shows the data very differently than the
bell curve. It ranks everyone from bottom to top, like the bell
curve does. But it’s different from the bell curve because it
doesn’t measure how many of them got a certain score. It
measures how good they are.
So the x-axis is students ranked from bottom to top. The y-axis measures their ability; their ability to do science, or write,
or read, or play basketball, or whatever.
It shows you that 80 percent of the science capability is
carried by 20 percent of the kids. In fact, if you look a little
closer, you will see that the best kid has 50 times the “science
horsepower” as the worst kid, and 14 times as much as the
average kid. In this graph, the average is 77, but the top is over
500. This is because the very best kids could answer far more
difficult test questions for extra credit and get a score of 500
percent or 1,000 percent.
Recruiting Power Players
The Power Curve also shows you one other thing that the bell
curve doesn’t even hint at: the tremendous capacity of the very
best. Let’s say the top student in the class got 100 percent and
the next one below him got 98 percent. Is the best student
really 2 percent better than the second best student?
In the school of hard knocks, where passion and performance
are far more important than answering questions correctly, the
best student is probably 50 percent better at science than the
second best. Not 2 percent better. This is incredibly important.
If you care about curiosity, discoveries, research, commitment,
and results, recruiting the best instead of second best is huge.
For you, the talent scout, the test was an easy way to sort the
winners from the losers. I’ll give you a powerful illustration of
that in a few pages.
Average Is . . . Average
80/20 is unconcerned with “average.” Why? Because almost
nobody is average, and the ones who are don’t matter much
anyway. Instead of emphasizing mediocrity, the Power Curve
focuses on ability. It zeroes in on the best, the cream of the
crop.
By the way, “A” players are usually picky and demanding.
They tend to be prima donnas and break a lot of rules. They
need special care and feeding. Your number-one sales diva,
who outsells everyone else three to one, may insist on having
her own private dressing room, a masseuse, and a personal
feng shui consultant. That’s just how “A” players are. If you
don’t like that, you can always hire “B” players and be
mediocre, if you prefer.
In business we talk about “averages” all the time. Average
transaction size, average number of customers who walk
through the door every day, average number of purchases, etc.
And while those are convenient handles that everyone knows
how to grab on to, those numbers almost never tell you what’s
really important. Like which are the top 20 percent of
transaction sizes? Who are the most important customers
walking through the front door? Who makes a lot of purchases,
instead of just a few?
The 80/20 Power Curve is far more useful than the bell curve.
You need to resolve to stop thinking in terms of averages.
Instead, think in terms of extremes and multiples, exponential
growth and powers of ten.
The Power of Power Laws
The math that drives 80/20 is called power laws. A Power Law
more or less says that if foxes are 10 times bigger than rabbits,
you can expect 10 times more rabbits than foxes. And if horses
are 10 times bigger than foxes, you can expect 10 times more
foxes than horses. On it goes, down to the smallest of insects
and even bacteria.
Power Laws tell us that an accurate picture of cause and
effect is best expressed in powers of ten. They tell you that
your customers’ ability to spend money is not in increments but
multiples.
The Richter scale measures earthquakes. It’s based on Power
Laws. A 5.0 on the Richter scale is barely noticeable. A 6.0 is
10 times more powerful, likely to knock objects off of shelves
and might cause injuries. 7.0 is 10 times more powerful than
that, enough to level homes and buildings and inflict loss of
life.
The 1-to-10 Richter scale is a far more useful way of
expressing the power of earthquakes than regular numbers,
which would have to be one to 10 billion. Imagine a radio
announcer saying, “Last night’s earthquake had a strength of
100,000. Fortunately, almost nobody noticed.”
There are no world-famous 5.0 or 6.0 earthquakes because
they’re not even big enough to shake you awake in the middle
of the night. But the 2010 earthquake in Haiti was 7.0. The
devastating San Francisco earthquake of 1906 was 8.0.
5.0 earthquakes are 10 times more common than 6.0s, which
are 10 times more common than 7.0s.
Decibels measure sound the way the Richter scale measures
earthquakes, except every 10 decibels signals a 10-times
change in power. A range of 0 to 120 decibels is a lot more
manageable and intuitive than a billion-to-one range in power.
Decibels convey how your ears perceive sound much better.
To see cause and effect in your business as it really is, shift
your business thinking. Business is not about increments. It’s
about the Richter scale and powers of 10.
PARETO SUMMARY
▷ The real power of 80/20 is 80/20
2, 80/20
3, and so on. It
keeps going until you run out of things to count.
▷ 80/20 applies to everything in the world that has positive
feedback, from the income of 7 billion people to the
Forbes 400.
▷ Almost everyone talks about “average,” but average
equals mediocrity. The 80/20 Power Curve is about
results.
▷ Top performers are not twice as good as average
performers. They’re more like 100 times better.
▷ Everything that really matters in business isn’t linear, it’s
exponential. 80/20 is about Power Laws—powers of 10.
You should always think in multiples of 10.
