Sunday, September 8, 2013

Applying the 80/20 Rule

In 1906 an Italian economist named Vilfredo Pareto analyzed the distribution of wealth in Italy and discovered 20% of the people owned 80% of the wealth[i]. [In the US, Wikipedia suggests the top 20% own over 85% of the assets[ii], but that’s a different blog.]

Interesting, but not the stuff that makes us change how we do our work. Fast forward to the 1930s and 40s. Dr. Joseph Juran, an early quality management guru, discovered the broad principle of “the vital few and trivial many.” In the magic of naming conventions, this broad observation, combined with Pareto’s economics work led to this phenomenon being labeled as “Pareto’s Principle.”

Pareto’s work was a single statistic. Juran’s a broad principle. Combined they became the ubiquitous 80/20 rule, which in one general form states that 80% of the results are due to 20% of the actions.

Here’s an example of the 80/20 rule in action:

Many corporations discover that 80% of their profits are derived from 20% of their customers.

They also may discover that 80% of the time spent producing work also applies to 20% of the customers.

The problem for most corporations is there is not a 1-1 correspondence between the two sets of customers. Some of the customers sucking up great gobs of time produce very little (or even negative) profits.

One result of this kind of analysis is frequent buyer programs. Airlines, for example, want to capture business flyers who regularly travel and often pay more for a ticket because they don’t qualify for advanced purchase pricing or multiple day stays. These fliers provide a disproportionate share of airline profits for the same or less cost than the typical family traveler.

How can you apply this principle in your life?

If you want to be more productive, you can begin by learning how the 80/20 rule applies to your work. We have lots of authors who read this blog, so I will use them for my examples. Self-published authors have an easier job here because they have access to all of their statistics. They can tell exactly how many books sold on Amazon, Barnes & Noble, Booksamillion, Kobo, and individual bookstores.

I’d bet that for most authors, 20% of their outlets account for 80% of sales and likely of profits. Looking at how they generate profits has led some authors to choose to publish exclusively on Amazon. Doing so, they get a higher royalty rate from Amazon. The potential profits lost from foregone sales at other outlets are more than made up by the extra royalties. As an extra bonus, these authors can apply the time they would have used to create the extra formats needed by other outlets, to publicize for these venues, etc. and apply that time to writing—the thing that generates future sales.

This kind of understanding is why Joe Konrath no longer goes on book tours. He can make much more money writing new works than by meeting a few fans at signings. Of course, he spent years developing a platform, which illustrates that we need to continue to evaluate our current decisions. What was right for last year may not be right for this one.

Authors who decide they must do all of their own marketing, or design their own websites, or create their own book covers may be ignoring the effects of their personal 80/20 rule. If they paid someone for those services they would have more time to write. Writing more develops more products to sell. Your fans will buy more from you, but only if you write more.

I read a comment recently that struck me. The author noted that large publishers did not expect new authors to make them money until their fifth book. They’ve lost that patience, but when we are our own publisher, perhaps we should be taking that long view for ourselves.

I know that if you absolutely do not have the money to invest in a career, you will have to do it all yourself. However, if you can invest, you must decide the best places to do that, and the 80/20 rule should help you to find which 20% of stuff you can farm out that will save 80% of that kind of effort.

One last word. I’m a math guy and know it is possible to run everything “by the numbers.” Fun and enjoyment have intangible benefits. If you really love doing a task and would miss it if you didn’t, then by all means keep doing it—but don’t fool yourself into thinking it’s a good business decision; it’s a life decision, and that’s okay.

~ Jim


E. B. Davis said...

Few writers share your perspective, Jim. But I think you've made a great point. In business, I learned that hiring the right people added to our profits more than me trying to wear 50 hats.
After writing three manuscripts by various methods, I hired Ramona Long to review the first act of my fourth novel. Her insights have saved me time. I can change the script before progressing to the next act. Had I not received Ramona's feedback, I'd have massive revisions throughout the script. It was money well spent.

Anonymous said...

What a great way to clarify the need to analyze the efforts authors put into their work. So many spend countless hours doing work they could hire out, then countless more hours on promotion efforts that reach primarily other authors seeking promotion efforts, not the readers who might buy the books and become fans. All at the expense of time that could be used to produce more work!

Warren Bull said...

The Los Angeles Police Department once had a special unit that ignored crimes by most offenders and focused only on the most dangerous criminals.

Gloria Alden said...

Interesting blog, Jim. It's one of reasons I limit my online time to only a few places. I choose to not Twitter or join Goodreads or any of the other time wasting places out there. I don't go on Facebook very often, either. The days I do I find I can spend a half hour or more and that's time I don't want to spend there.

Shari Randall said...

Great post, Jim, so much food for thought about the business side of publishing. I learned a lot.

Shari Randall said...

Great post, Jim, so much food for thought about the business side of publishing. I learned a lot.

Paula Gail Benson said...

Terrific advice, Jim. And, I agree, life decisions can be as valid as business ones.