CHAPTER 1
How 80/20 Works and Why
A few years ago I held a seminar in Chicago called âThe 80/20 Seminar for Direct Marketing.â 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, âEverybody stand up if you have shoes on.â
Everyone stood. I said, âIf you own fewer than 4 pairs of shoes, please sit down.â A bunch of people sat down, and about 50 were still standing.
âIf you own fewer than 8 pairs of shoes, sit down.â
More people sat down, about 30 left.
âIf you own fewer than 16 pairs of shoes, sit down.â
Thirteen people, 9 of them women, still standing.
â32 pairs of shoes.â
dp n="29" folio="2" ?Three women standing.
I smiled. âDonât be embarrassed, ladies. Just tell the truth, cuz Iâm illustrating a principle here. How many of you have more than 64 pairs of shoes?â
Two sit down. One left standing. She cringes with embarrassment.
âHow many shoes do you have?â
âUmm, about 80.â
âThank you so much. You can sit down now. Give this woman a hand!â
Everyone clapped. â20 percent of the people own 80 percent of the shoes. Can you see that?â I said. All nodded in agreement.
âEverybody stand up againâeveryone who owns at least one domain name.â They were all marketers, so it was pretty much everybody.
âSit down if you own fewer than 10.â
Half the room sits down.
âFifty.â
Half again sits down. Weâve got maybe 20 still standing.
âTwo hundred.â
A bunch more sit down, 10 standing.
âFive hundred.â
Five people left. I keep goingâ1,000, 2,000, 5,000.
At 5,000 domain names, Iâve 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. âHow many domain names do you own?â
âTwelve thousand.â
Mickie was a âDomainer,â 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 everythingâbut 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 Londonâs underground âTubeâ 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 youâve learned to recognize it, you canât 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, youâre tempted to treat them all the same. Well theyâre 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. Thatâs because 80/20 isnât a mere rule of thumb, and itâs not just for business. Itâs a law of nature. John Paul Mendocha observed that 80/20 is literally the âInvisible Handâ 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.)
dp n="31" folio="4" ?Itâs not the exact number 80/20 thatâs the rule; itâs the principle of positive feedback, which is when behavior is rewarded so that it produces more of the same behavior. Sometimes itâs 60/40 or 70/30; sometimes itâs 90/10 or 95/5. The exact numbers arenât so important. But itâs always there.
Itâs 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 Iâve never found about 80/20 anywhere else.
Almost nobody reads simple election statistics that â14 percent of the voters turned out at the polls in this electionâ or â5 million people donated at least $5 to the election campaignâ 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 youâve got average math skills, in literally 60 seconds youâll be able to predict, with spooky accuracy, that 735 donors gave that same election campaign more than 10 grandâwith 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? Youâll know.
At lunch on the back of a napkin, youâll be able to shuffle through all kinds of ordinary facts about your businessâhow many customers, how many VIP members, how many shoplifting incidents, the number of people who opened yesterdayâs email. Youâll 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 thatâs 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. Thatâs 80/202.
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. Thatâs 80/203.
And it just keeps going because 40 percent of the drivers are driving on 0.2 percent of the roads: 80/204. 32 percent take 0.016 percent of the roads. Thatâs 80/205.
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. Thatâs rightâa good salesperson isnât 50 percent better, he or she is 16X better. That means thereâs huge leverage in 80/20: much to be gained if you pay attention, much to lose if you donât.
The Leverage Power of 80/20 Is in the Layers 80/201 = 16:1
80/202 = 250:1
80/203 = 4,000:1
80/204 = 65,000:1
80/205 = One million to 1
... and so on.
If youâre not a math person, stick with me and Iâll make this abundantly clear. This is relatively simple and HUGELY important, because if you want to influence that trafficâsay, sell them something by putting up a billboardâyou can accomplish as much with one billboard on a major expressway as 100,000 yard signs on residential streets. Thatâs just a simple, elementary example of leverage. As the story unfolds, youâll 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. Thatâs million-to-one leverage, and itâs not a joke. Itâs rea...