**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.