80/20 Sales and Marketing by Perry Marshall has been one of the most
interesting business books I’ve read. What is it about? Obviously about sales
and marketing. What does 80/20 stand for? This is where things get really
interesting. What Marshall is refering to is a universal law of nature and how
it can be used to one’s advantage in sales and marketing. What is this law?
80/20 is based on the Pareto principle, described for the first time by
Vilfredo Pareto in 1896. Its most basic meaning may be
summarized as “small things having a disproportionate effect”. It can be observed
in many different areas of life:
20% of customers are responsible for 80% of the revenue.
20% of people in a country own 80% of the wealth.
20% of your activities account for 80% of your results.
20% of employees account for 80% of a company’s productivity
20% of roads are carrying 80% of the traffic.
The exact numbers don’t matter. Sometimes it may be 90/10 or 70/30. The
general principle seems to always be valid. What’s even more interesting is the
fractal nature of this principle. For example:
80% of 80% of cars are using 20% of 20% of the roads, meaning: 64% of cars are driving on
4 percent of the roads. This is hugely disproportionate. One could go even
further: 56% of cars are driving on 0.8% of roads.
Marshall’s point is: This law is everywhere. The focus of his book is on
applying it to sales and marketing and looking at it from a more mathematical
perspective. If we find out which customers spend the most money on our
product (the 20%), we can be absolutely sure that around 20% of those customers
would spend even more money, if they had the opportunity. This requires
identification of the 20% and a little creativity to find a way to give them
something of more value that they’d pay for as well. How much more would they be willing to pay? This is where things get crazy.
It is governed by a power law. The top customer doesn’t just spend somewhat more money than the
average customer. He spends maybe 16 times as much. And if he doesn’t, he
would, if a particular business would create the opportunity.
Marshall is very good at explaining this concept. It is simple and deep at the
same time. It can be applied to any problem that allows for counting things.
To quantify this principle, Marshall put up a website: www.8020curve.com
Here you can apply the 80/20 principle to get some approximate numbers.
In order to try it for myself, I quickly dug up an old report from 2012 about the revenue of the Fortune 500 companies.
All of them together achieved a revenue of about $825 billion. Using only these two data points (number of companies and total revenue), I calculated the revenue that has been achieved by the top 10 companies. The result is $265 billion. That’s pretty close to the actual $224 billion, that have been achieved. The 80/20 principle predicts that 32% of the profits would have been gathered by 2% of the companies. In reality they got 27%. This is in accordance with a 75/25 principle – close enough.
What is this good for? If you know the number of your customers and the amount of revenue you make, you will find a similar distribution. A few customers spend the most money. If you’re delivering just one product for a fixed price and literally everyone pays the same amount, then you can get an idea of what some of your customers would be ready to pay. You may come up with an idea to give them something more expensive, like Starbucks selling a $2999.95 coffee machine. Or you could come up with a way to sell more frequently. 20% of your customers would buy more frequently then the other 80% put together.
With regards to sales, Marshall teaches you for example what to do instead of cold calling. His main tool is the internet, especially google ads.
Cold calling doesn’t apply 80/20. It’s random and betting on averages. Averages can get you only so far. 80/20 is your friend. He gives an example of how he’s been able
to dramatically increase the reputation of his small business of 15 employees
with comparatively little effort, by focusing on a few important things to
generate solid leads. While not everyone can emulate google and go from nobody to $1 billion in sales within 5 years, Marshall promises that the general principles behind that success can be emulated to yield massive results. He guides you through the principles of split-testing in order to increasing your conversion rate from google ads. One key point is to split test every element in your sales process (ad, landing page, sales page, order form). That way, the improvements multiply to yield bigger results. The essence of it is to keep testing everything.
Another big emphasis of his is the USP, the Unique Selling Proposition. It is, what distinguishes you from the competition. How do you develop it, how do you use it? Marshall explains it well. It’s not necessarily a direct application of the 80/20 principle. Only so far as to get you out of the 80% of the competitors into the 20% or higher. When you think of your favorite business, a few key points will come to mind immediately, such as “high quality”, “quick delivery”, “many options”, “great service”. Those are USPs and they really work.
There’s more. How about your work day? 20% of your time provides 80% of your results. If you get paid $15 per hour, some of your tasks will be worth $0.01, others will be worth $100 or more. Identify the most valuable tasks, then focus on those and outsource the rest, says Marshall. If you shift your work from low-value to high-value, not only will you be more productive and profitable, you will create a new job for someone else. Marshall outlines how to hire and use assistents, what to use them for and when to use them. Focusing on your strengths and letting others handle the weaknesses is another application of this principle. For that purpose Marshall created the Marketing DNA Test. If you buy the book, you’ll be able to take it for free. It measures different aspects of your personality and shows you were your strengths in marketing lie. If you sign up, you’ll get a couple of follow up e-mails, giving you some additional information about your results. I found them helpful and very accurate. If you work in a team, understanding everyone’s strengths will really help working together in more efficient ways. It will also aid you in finding the right people to work with.
He goes on talking about the role of controversy in marketing, how to conduct market research and what to do with your e-mail lists. Some of the tools recommended are outdated now, but that doesn’t affect the general strategy.
Conclusion
Overall, Marshall drives the point home again and again and again – small things have a disproportionate effect. This principle applies to every area of life and business. In the area of marketing and sales, he clearly explains the strategies he recommends to skip the unimportant things and focus on the important things. By doing that, time is saved and effort is rewarded more highly. This is an easy read and once you’ve seen the light, you cannot unsee it anymore. It’s worth taking notes while reading and putting a few book marks in place to refer to later. I’ve purchased the kindle edition and am pleased to say that it contains a table of contents and is well formated.
Quotes
Whenever you find yourself obsessing over everything, you’re making a mistake…80/20 inherently means that “good enough is good enough.”
Handy rule of thumb: 80/20 says that 20 percent of the people will spend 4 times the money. It also says that 4 percent of the people will spend 16 times the money. Memorize this – it’s one of th emost powerful facts you could ever know about business.
Any business can be transformed the way Starbucks transformed coffee. It doesn’t matter if it’s insurance, or metal stampings, or jet airplanes; a “gourmet” version is always possible. This can transform the entire industry. Starbucks completely changed the very idea of coffee and inspired thousands of imitators.
There’s nothing worse than selling for a company that won’t stand behind what you promise…There’s nothing better than selling for the only company who will stand behind you.
Any time you want to figure out how to get more money for what you sell, ask yourself this question: “How do I make what I give my customer more of a finished result and less of a procedure?”
If you want to command higher prices than anyone else, then guarantee better results than anyone else.
The pursuit of excellence and quality, and the keeping of promises and deadlines, are the only things that keep the civilized world humming along. Everything else is destructive.