2 results found.
2 results found.
Jul 13-Jul 17, 2020
a look back at this week’s essays…
Pareto Principle, Part I:
The Secret of the 1%
It may be the most important idea in economics – but it also applies to science, to sports, and to human behavior. It explains not only why things are the way they are, but also why, no matter how you try, it’s almost impossible to change them.
Welcome to a series of essays on the Pareto Principle!
Click here to read more.
The Pareto Principle, Part II:
A Universal Law That Even Applies to Business
I don’t remember exactly when I first read about the Pareto Principle, but I’m certain I did not grok it early in my career. It wasn’t until I was running a multimillion-dollar company in which I had secured a profit share… and there’s a good reason for that.
Click here to read more.
The Pareto Principle, Part III:
Entropy and the Impossibility of Equality
When I was young, the campaign for equality was about the protection of equal rights under the law.
Today, the call for equality is very different.
Click here to read more.
what I’m reading
Alchemy: The Surprising Power of Ideas That Don’t Make Sense by Rory Sutherland
Rory Sutherland understands marketing. But he understands more than that, too. Alchemy is a fast read for marketing professionals, replete with philosophical observations and humor that makes the reading great fun, even for the most seasoned marketing professional.
Check out this online interview with Sutherland here.
A few testimonials:
“This is a breakthrough book. Alchemy is wonderfully applicable to about everything in life. Furthermore, it is funny as hell.” – Nassim Nicholas Taleb, author of The Black Swan
“So many of us are trained to focus on data and the logical, and Alchemy makes a great argument for the irrational. I think everyone could use a reminder that asking dumb questions, reframing old ideas, and, in turn, trying to create a bit of magic, can lead to unexpected solutions for some of our most difficult problems. Alchemy was a reminder of that and then some.” – Inc., “Great Books for Anyone Who Wants to Get Ahead in Life”
“Sutherland, the legendary Vice Chairman of Ogilvy, uses his decades of experience to dissect human spending behavior in an insanely entertaining way. Alchemy combines scientific research with hilarious stories and case studies of campaigns for AmEx, Microsoft, and the like. This is a must-read.” – Entrepreneur, “Best Books of the Year for Entrepreneurs”
“Buy this book. I loved it. It’s full of great insights.” – Matt Ridley, bestselling author of The Rational Optimist and Genome
recommended links from this week’s blog
* The latest issue of AWAI’s Barefoot Writer – Click here to read the July issue.
* Jeff Allen on “Understanding Your Love Language” Here
* There are 8 musical terms that every music lover should know. Click here for a good explanation of each one.
* “This Is Where Your Wine Corks Come From” Here
* “How to Bleed in the First Line” by James Altucher – Click here to read the entire essay.
* Here’s more consumer advice from the FTC.
* Fun stuff from the Guggenheim Museum’s Works and Process project…here.
What do you attribute your success to? Could you narrow it down to just a few main reasons? And based on your experience, what would you say are the main reasons that most people fail to succeed?
One more question: If you could give people like me your best 3 pieces of advice, what would they be?
Your questions are all interrelated. I’m going to answer them this way:
* Want. I grew up as one of eight children, living in a small house across the street from the RR tracks. I wore hand-me-down clothes, drank powdered milk, and worked four hours a day on Saturdays for a weekly allowance of 33 cents. In grammar school, this seemed normal. But in high school, I became acutely aware of and embarrassed by my family’s modest circumstances. This embarrassment fueled a lifelong desire to become more than I was. In short, being a have-not was, for me, a great gift.
* Commitment. My desire to be successful was always there, but I never achieved anything extraordinary until I realized that desire alone was not enough. There were plenty of people around me with the desire to succeed. Some of them had more talent. Many of them had more resources. Some were physically more attractive. (Don’t kid yourself – a big advantage!) And some were, although I hated to admit it, smarter. To succeed – to get myself to the front of my imaginary pack – I had to change my behavior. I had to commit to three things: I would work harder than anyone else in my peer group. I would become more knowledgeable than any of them. And I would get more things done – more things that mattered.
* Help. I have no doubt whatsoever that my desire and commitment alone would have been enormously helpful in advancing my career. But things began to move so much faster after I humbled myself enough to be mentored by several people that taught me things about work and life that it might have taken me decades to learn on my own. I don’t believe you need many mentors. One is good. Two or three are fantastic. Looking back at my career as I approach my 70thbirthday, it’s easy to see that I had four great ones: my mother, who gave me my contrarian nature; my father, who gave me my ethical values; JSN, my former boss and partner, who taught me how selling works; and BB, my current partner, who taught me (and is still teaching me) that the opposite of every true thing is also true.
* Wisdom. I’m not sure if anyone taught me this or if I somehow knew it. But it has been clear to me for as long as I can remember that you can accomplish much more in life if you set, as the purpose of your work, something that is outside of yourself. As an employee in business, that meant working to grow the business I worked for, not to get the business to pay me more. I knew that if I made myself invaluable to my boss, he’d take care of me. Later, in developing partnerships in every sort of project and business, I always had that same idea: Make it work for the other person first and it will come back to you.
* Ignorance. We are all ignorant in the beginning. To become knowledgeable about anything, you must accept the fact that you don’t know and put in the time to know. It takes between 500 and 1000 hours to become competent in any complex skill or career, and 5000 hours to become a master. You have to be committed to constant learning.
* Laziness. We are all lazy, naturally lazy. Being lazy is the source of creativity. We want to get what we need or want by working as little as we can. The problem with this is that if you give in to laziness, you will never achieve anything important. You will always be one of the pack. To be super-successful, you have to be willing to work much harder than the average person. You have to work hard for 60 to 80 hours a week.
* Arrogance. Many smart, hardworking people make advances but then hit a plateau. This often happens because they make the mistake of thinking that they are special. They believe that they know better than anyone else. They feel that they are “the smartest person in the world.” The smarter and more successful you are, the more important it is to be humble.
* Read The Pledge.
* Then read Automatic Wealth.
* Then read Ready, Fire, Aim.
Hope this helps!
Have a question for me? Submit it on our Contact Us page.
For a look back at the stock market, click here.
“The way is long if one follows precepts, but short… if one follows patterns.” – Lucius Annaeus Seneca
The Pareto Principle, Part II:
A Universal Law That Even Applies to Business
The Pareto Principle would be a significant contribution to learning if it applied only to economics. But as I said in Part I of this series, it applies to just about everything. Whenever and wherever you measure resources or the relationship between cause and effect, you’ll find this lopsided distribution.
A few examples:
* 80% of taxes are collected from 20% of taxpayers.
* 80% of government spending goes to 20% of its expenditures.
* 80% of new technology is patented by 20% of technology companies.
* 80% of the drugs approved each year are made by 20% of the research labs.
* 20% of criminals commit 80% of all crimes.
* 20% of drivers cause 80% of all traffic accidents.
* 20% of factories produce 80% of the pollution.
* Through the 2015-2016 NBA season, 20% of franchises won 75.3% of the championships.
I could go on, but you get the point. Economics. Science. Human behavior. Sports. In playing with his pea plants, Vilfredo Pareto seems to have discovered some sort of universal pattern.
We’ll look into the philosophical implications of this on Friday in Part III. Today, let’s take a look at how the Pareto Principle applies to something very practical. Let’s talk about business.
Understanding business through the 80/20 lens
I don’t remember exactly when I first read about the Pareto Principle, but I’m certain I did not grok it early in my career. It wasn’t until I was running a multimillion-dollar company in which I had secured a profit share… and there’s a good reason for that. There’s something about aligning one’s interests with those of the business that makes such insights invaluable. It is immensely helpful in analyzing problems, understanding challenges, and making important decisions.
Since then, I’ve written about the 80/20 rule many times. And now that I think about it, I can say that the Pareto perspective was responsible for all of my bestselling business books, including Automatic Wealth and Ready, Fire, Aim.
There are so many examples of how the Pareto Principle applies to business:
* 20% of a company’s salesmen produce about 80% of its sales.
* 20% of a company’s customers/clients account for 80% of the purchases made.
* 80% of all customer complaints come from 20% of the customer base.
* 80% of customer complaints are related to 20% of the company’s products.
I could list hundreds.
But there are three categories that stand out:
If you look at almost any business, you will find that about 80% of its revenues come from only 20% of the products sold.
This seems obvious to me now. It’s almost a bromide. But it was a revelation when I first figured it out.
At the time, we had about 20 product lines and were doing about $20 million in revenues, with average revenues of $1 million per product. I was well aware that some products performed much better than others. But until I looked at our sales from the Pareto perspective, I didn’t realize how lopsided the distribution was.
Sixteen of our products generated sales of $5 million. They averaged just $312,500 each. The rest of our sales – $15 million worth – came from just 4 products. An average of just under $4 million each.
The imbalance was much more extreme than I would have guessed. But it allowed me to understand, instantly, that my habit of giving equal attention to all of our products was a big mistake.
The cost of producing and marketing each product was about the same, but the revenues were so terribly uneven. It was easy to see that we were basically losing money on 80% of our products and making huge profits on just 20% of them.
If profits were the lifeblood of a business (and they are), why was I not giving 80% of my time and attention to the 20% that would yield 80% of our profits?
We had ben dividing our marketing resources equally among the products we were selling. After understanding the Pareto Principle, we directed 80% of those resources to the top three or four. That resulted in a much faster-growing customer base, and, subsequently, higher revenues and profits.
After learning that lesson, I began to apply it to every other aspect of our business. One challenge had been the issue of customer lifetime value.
In our industry (information publishing), we measured our long-term success by renewals. The average first-year renewal rate was about 20%. It was generally accepted that if you could raise it by increments – to about 50% in the second year and 60% thereafter – you could grow the business.
Then one day I met a man named Jay Abraham who had a crazy idea he was peddling about what he called “the back end.” The idea was that instead of trying to boost our renewal rate by increments, we could do much better by immediately selling existing customers more expensive versions of what they had already bought. If, for example, they had spent $39 for a newsletter on executive productivity, we could sell them a special report “on the backend” written by an expert on the same topic for, say, $79.
I got it instantly, because I was thinking in terms of 80/20. I was pretty sure that 80% of our existing subscribers would never buy a more expensive back-end product, but that 20% of them would. And the first test we did – selling an information product for hundreds of dollars – more than verified that. It blew us away! (Today, the same sorts of back-end information products often sell for thousands.)
Those two applications of the Pareto Principle made me a better at developing products and marketing them. But I’m most excited about a realization that came late in my career.
I was thinking about the writers, editors, publishers, copywriters, and marketers I had worked with, and it occurred to me that Pareto’s Principle applied to them as well: A relatively small percentage – maybe 20% – had been responsible for the great majority of the business success I had witnessed.
I should qualify that. Building a business is a collaborative effort. Dozens or hundreds of people are involved in getting the work done.
But it would be naïve to pretend that everyone is equally responsible for its success. There is always a small number that stand out clearly. They work harder. They think harder. They never run away from a problem. They never hide a mistake. They treat your business as if they owned it. In the skyscape of any company’s employees, they shine where the best of the others only glow.
Although money matters to them, these superstars are not motivated by it. Nor are they motivated by the desire for approval. They are unique. They are rare. And they are worth their weight in gold.
Based on my observations, if you are very lucky, 20% of your employees will be superstars.
Something to seriously consider.
I’ve heard it said that the Pareto Principle is the best-kept secret in business. That’s difficult to believe if you are familiar with business literature. There are literally thousands of articles, essays, and manuals written about it every year.
So, no, it’s not the best-kept secret in business. But it is routinely ignored. I’m not sure why that is, but I do know this: If you pay attention to the Pareto Principle in your business, you will be glad you did.
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