This is Part 2 in a three-part series on the Pareto Principle by Perry Marshall, author of 80/20 Sales & Marketing and The Ultimate Guide to Google AdWords. Read Part 1 here.
The 80/20 rule is powerful because it's a law of nature – much like the Golden Ratio, the Butterfly Effect and chaos theory are laws of nature. In fact it's driven by the same underlying causes.
Last time we talked about how 80/20 applies to almost everything you can measure, and how you can also apply 80/202: 4% of your effort produces 64% of your results, and 80/203: 1% of your effort produces 50% of your results.
But it doesn't stop there!
Psychology of War
150 years ago, the military genius from Prussia, Carl Von Clausewitz, attained legendary status for his command of the psychology of war. Maybe his most significant contribution was his principle of the Force Multiplier: A tiny advantage in firepower and manpower leads to a huge advantage in outcome:
If Army A has 2 units and Army B has 3, force B has an advantage over A of 3²-2² which is 5.
If Army A still has 2 units and Army B has 4 units, force B has an advantage of 4²-2² or 12.
If Army A still has 2 units and Army B has 5, force B has an advantage of 5²-2² or 21.
If you are a small company (or one-man band) this has terrifying consequences. It means if you're outnumbered 4:2, your odds of losing are 12:1.
This might explain why you're struggling to compete with much larger companies.
That's the bad news.
But the good news is, small companies can apply Force Multiplication to 80/20. Here's how.
60% of your business comes from 5% of your customers. Taking attention away from the bottom 20% of your customers and adding it to the top 5% has disproportionate advantage.
But that's not force multiplication – yet.
Force Multiplication is when you also recognize that 60% of your business comes from 5% of your product line, which is bought by 5% of your customers.
That means 5% of customers X 5% of your product line controls 60% of 60%, or 36%.
So the question is:
How can you improve the sales of 5% of your product line to 5% of your customers?
If you can double the connection between those few customers and those few products, your sales go up 36% – even though you only altered 0.25% of your business.
I'll bet you anything, your top customers understand your best products only partially. Are they applying them to full effect? Are they getting full benefit from their use? Are there some departments that love your stuff and others that haven't even seen it?
What if you made a minor modification to one of your products, to the liking of your #1 customer? Would your sales go up 10% overnight?
If 1% of your product line generates 50% of your sales…
That means making custom versions of that tiny percentage of your product line has disproportionate impact.
A perfect example of this is found in the publishing industry. The #1 selling book of all time is the Bible. It outsells other books to such a degree, the book industry doesn't even bother to report it. But is there just one Bible?
Heck no! There's the Living Bible, the New Living Translation, the King James, the New International Version and dozens of others. There's also the NIV archaeological study Bible, the Mom's Devotional Bible and the Extreme Teen Study Bible.
I even heard there might be a Red Letter Bible for One Legged Owners of Pot Belly Pigs, but the rumor was unconfirmed as this article went to press.
But that's not the only way to Force Multiply. There's also your sales people. 10% of your sales people (three of them) handle those top 5% accounts and they are burdened with all kinds of inefficiencies. The Roger sales manager is always nagging Scott and Sharon for their expense reports, which they chronically seem unable to turn in on time.
Tim is an organizational disaster.
He gets bogged down with plane flights and travel schedules and paperwork. He's such a skilled negotiator, Jimmy Carter should have brought him in to solve the Iranian Crisis in 1979, but he double books appointments and never seems to know where he left his tie.
All the company needs to do is hire one or two Personal Assistants for the sales team. They need to just completely stop expecting them to be administrative geniuses. Don't worry if the guy can't spell. Don't worry if he can't keep track of his receipts. Don't worry if he constantly gets in car accidents – just work around it and make sure the guy can SELL.
They would immediately spend 20% more time servicing customers and closing deals. 36% increase in sales just by better connection to the product lines and 20% more of that 36%, that's a total increase of 45%.
This also applies to web pages and web analytics. There's a million paths customers take to buy, but a precious few keywords times a very few web pages times a small number of phone scripts and inside sales people equals a tiny number of things to optimize.
You've got 100,000 prospects in the database and 10,000 customers who bought something in the last 2 years. Which ones do you focus on?
The #1 Secret to Mailing List Leverage: RFM
There's a great rule for this: Recency – Frequency – Money. Also known as RFM:
- Who bought most recently?
- Who buys most frequently?
- Who spent the most money?
What happens when you look at the 20% most recent, who were also the 20% most frequent, who spent the top 20% amounts of money? You get 1-5% who are very likely to come back and buy again.
I think this is best portrayed as a 3D cube, where suddenly thousands of customers doesn't look like nearly so many, and you can visually see the large impact of a very small number of customers on the upper front corner of the cube.
I've rarely seen a business that was truly Force Multiplying the way I describe it here.
You're David, up against Goliath?
You've got 14 employees and they've got 60? You don't need to hire 46 more people. You need to give your sales people a personal assistant. You need to optimize 5 web pages and 10 keywords. You need to Force Multiply.
In Part 3 I'll talk about Force Multiplying your own personal persuasion skills.
Special Offer to WordStream Customers: Get Perry Marshall's new book 80/20 Sales & Marketing (list price $22.00) for one penny plus shipping.
This post originated on the WordStream Blog. WordStream provides keyword tools for pay-per click (PPC) and search engine optimization (SEO) aiding in everything from keyword discovery to keyword grouping and organization.
No comments:
Post a Comment