In this episode Josh talks with Perry Marshall, Author of 80/20 Sales & Marketing: The Definitive Guide to Working Less and Making More. They talk about the 80/20 rule and the Network Effect.
Perry Marshall is one of the world’s most expensive and sought-after business consultants. Clients seek his ability to integrate engineering, sales, art and psychology.
He launched two movements in modern marketing. His Google AdWords books laid the foundations for the $100 billion Pay Per Click industry, and techniques he pioneered are standard best practices. He wrote the world’s best selling book on web advertising, Ultimate Guide to Google AdWords.
More recently, he’s turned “80/20” into a verb. 80/20 is not just a fact about your business, it’s action you take on your business. 80/20 is the central lever for every great strategy. His book 80/20 Sales & Marketing is mandatory in many growing companies. His books are course material in several business schools.
In today’s episode you will learn:
- What is the 80/20 rule?
- How does it apply to sales and marketing?
- What does it mean that 80/20 is fractal and how that impacts sales and marketing?
- What do we need to know about network effect?
- Where does social media fit?
Narrator: Welcome to The Sustainable Business Radio Show podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. In The Sustainable Business, we focus on what it’s going to take for you to take your successful business and make it economically and personally successful. Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he’s learned through his 40 years of owning, running, planning and thinking about what it takes to make a successful business sustainable.
Josh: Hey, how are you today? This is Josh Patrick. You’re at The Sustainable Business podcast. Boy, am I excited today. Today, we have a guest who I have been trying to get on my podcast since I first met him a couple of years ago. For whatever reason, it never happened. But now, I’m here to say, it’s Perry Marshall.
I’ve got to tell you something. Perry is probably one of the smartest thinkers I have ever run across. Every time I go to one of his programs, I leave energized and a little bit confused, I have to admit that, because I’m not nearly as smart as he is. At any rate, we’re going to have an interesting conversation today. And so, since we have Perry waiting very patiently, I’m going to shut up and bring him in.
Hey, Perry, how are you today?
Perry: I’m great. It’s great to be here. It’s a cold afternoon in Chicago but it’s warm in my house and we’re having a great conversation so it’s great to be here.
Josh: I’m really excited to have you. I’ve been looking forward to this for a while.
Now, there’s two things I want to talk about today. One, is you’re known as Mr. 80/20 but what you really should be known as Mr. 80/20 of 80/20 because that’s where the action really is. I actually understand that one. The second thing I want to talk about and see if I can finally get clear on is what you call a network effect. Where do we want to start on 80/20 of 80/20 or network effect?
Perry: Let’s talk about network effect second. Let’s talk about 80/20 first.
When I was a sales manager at a software company, I read some book. The book said that, “80% of your sales comes from 20% of your customers, and 20% of your sales comes from the other 80%.” I thought, “Huh, is that really true?” I went to QuickBooks and I printed out this thing. I took a calculator and I just – top to bottom, and I– yeah, when I got about 20% through the customer list, sorted from the top down, it’s like, “I’ll be darned. Yeah, that’s like 80% of what we took in last month.” Well, that’s interesting like that was it.
There’s two things that I did not understand until later. The first thing that I didn’t understand was that 80/20 is not just this interesting business rule of thumb that happens to be true about like wealth and countries, and customers, and companies. It’s almost just about everywhere. It’s 80% of the dirt is on 20% of the carpet in your living room because there’s this path that people walk to go through it, and 80% of the traffic is on 20% of the roads, and 80% of the baby rabbits come from 20% of the rabbit moms.
It’s size of craters on the moon. It’s almost every spreadsheet in your business. It’s almost everything in a Google account if you’re advertising on Google. It’s everywhere because it’s a law of nature. There’s a law that says 80/20 is the name of it. It says that cause and effect are very, very unequal, okay. It’s how rivers flow. It’s population of countries. It’s all over the place.
Once you start to notice it, you can’t un-notice it. That’s the first thing that I didn’t understand. Anytime something is universal, you have to pay a great deal of attention to it because you’ll find all kinds of interesting ways all over the place where you can use it. That’s the first thing I didn’t understand.
The second thing that I didn’t understand is that it’s fractal. Now, that’s a weird word and we’re already getting really deep. What is fractal? Fractal means a pattern, inside a pattern, inside a pattern, inside of pattern.
Think of a big boulder, there’s some rain and a crack and it freezes. And then, that rock falls off onto the ground. Well, that rock has cracks and water gets in those cracks. And then, a piece of sand falls on the ground and then the sand has cracks and then the sand splits – pattern, inside a pattern, inside a pattern. A tree – there’s an overall shape of the tree but you zoom in, zoom in, zoom in down to the branches, and the leaves, and the veins, and the leaves. You see that same branching pattern over and over again. 80/20 is like that. There’s an 80/20 inside every 80/20.
And so, if you’re looking to make more money, if you’re working to not work as hard, if you’re looking to prioritize your time better, if you’re looking to make certain customers more profitable, if you’re looking to figure out which customers you should get rid of, then you need to start paying a great deal of attention to this because it means there’s levers, inside of levers, inside of levers.
And so, let’s step through this. I want to tell you a story that will kind of give you some context, especially for marketing people, but really anybody. I got this friend John Paul Mendocha. John, dropped out of high school at age 17, in Denver. He hitchhiked to Las Vegas and he became a professional gambler. His mom was thrilled about this.
Josh: I’m sure she was [laughs].
Perry: She went to mass every morning at six o’clock just to work out her anxiety.
John’s in Vegas. He’s playing poker for a living. After a few weeks, he’s like, “This is harder than I thought it was going to be.” He goes to a gambling bookstore. He runs into this guy named Rob, who runs a professional gambling ring, and they start talking. John goes, “Well, could you teach me what you do?” “Well, for a percentage of your winnings, I could teach you what I do.” And so, they make a deal and they shake on it. Rob says, “Jump in the jeep, John. We’re going for a drive.” So, they’re driving down the highway. John says, “So, how do I win more poker games?” Rob says, “The way you win poker games is you play people who are going to lose–
Perry: –and those people are called marks. You want the guy who got $5,000 of inheritance money from his grandma. He flew in from Wichita, Kansas. He landed in Lost Wages. You want to play poker with that guy.”
He goes, “Okay. Well, where do I find more marks?” He goes, “Here. I’ll show you.” He pulls into a parking lot of a strip club. They walk into the strip club and there’s all these, shall we say, distractions in the strip club. There’s loud rock music. There’s all these people drinking. There’s all this stuff going on. It’s noisy.
They sit down at the table. Rob always carried a sawed-off shotgun with him, everywhere he went, inside his jacket. He pulls out this sawed-off shotgun. He holds it under the table. And then, he opens the chamber. And then, he slams it shut so it goes [racking shotgun sound]. There are some biker guys over in the corner and they’re like, “Hey, who made that noise?” John’s looking at it this and he’s kind of alarmed. The owner of the club comes over and he’s like, “Hey, what’s going on over here?” Rob goes, “Nothing’s going on over here, just teaching the lad a lesson. Don’t worry about us. John, did you see those biker dudes who turned around when they heard that noise?” John goes, “Yeah.” And he goes, “Don’t play poker with them. They’re not marks. Play poker with everybody else.”
Well, that’s what, in my book, 80/20 Sales and Marketing, I call “racking the shot gun.” Everything you do in business or in marketing is racking the shotgun. You send an email. Most people don’t open it but some people do, that’s racking the shotgun. Some people click on the link and some people don’t, that’s racking the shotgun. Some people go to the website and sign up for the podcast or the webinar, or to get a quote, or they buy something. Any of those things, that’s racking the shotgun.
And so, coming back to 80/20, when you rack the shotgun, you separate the 80 from the 20. In the case of this strip club full of bikers, 20% of those people in that club are really bad ass dudes and you do not want to mess with them and 80% are marks. And so, you divide one group from the other. And then, whatever you’ve got left, there’s the top 20% of the top 20%. If we send an email and 20% of the people open it, 20% of those people are going to click on the link. That’s 4%. And 80% of 80% of what you’re going to get is going to come from the 4% who opened the link.
And so, this is true in customer groups. This is true and product lines. You have the top 20% of the top 20% produces 80% of the 80%. In other words, 4% produces 64%.
And then, you can take it another step further, 1% produces 50%. So, 1% of the people have 50% of the money, 1% of the customers write 50% of the checks, 1% of the employees create 50% of the problems. It’s everywhere.
When I learned this and understood it, it completely revolutionized my world. It changed the way I saw everything in business. That’s what 80/202 is. There’s 80/202. There’s 80/203. It actually just keeps going.
So, you have 8 billion people in the world. Well, 20% of the 8 billion have 80% of the money. 1.6 billion of those people have 80% of the money. You can keep taking the top 20% of the top 20%, of the top 20% until you get to Jeff Bezos. It’ll be accurate. It’s a law of nature. It’s like a law of physics. It’s like gravity.
Josh: So, if I’m thinking about running my business, and I have never played around with 80/20, besides my customer base, I probably want to be 80/20-ing everything in my business.
Josh: 20% of my processes bring 80% of my results.
Josh: Actually, 20% of that 20% gives me 95% of my results. If I’m not paying to that 20% of the 20%, somebody else is going to, and they’re going to come and they’re going to eat my lunch.
Perry: That’s right. That’s right.
And so, you start doing it on everything. So, you did something here that I am very happy about. You used 80/20 as a verb. You said 80/20-ing. I am 80/20-ing my business. What does that mean? It means you figure out, “What is the 1% or the 5% that generates almost all of the results?”
So, I’ve got 20 employees but actually one of them is as productive as 10 of them put together. It’s almost a certainty that this will be the case. What do you do to make that person more productive? There’s almost certainly stuff that they just shouldn’t have to do anymore. Why is the salesperson chasing around late payments? Can we have somebody else do that?
This is everywhere. Most people just sort of assume that most businesses are fairly well run and most industries are reasonably well organized. No. No. Most—
Josh: My experience, by the way, is the exact opposite.
Perry: No, it’s 80% wasteful. It’s 80% ineffective. Some of that you have to do but, most of it, you don’t.
Josh: Well, the interesting thing is, I’m assuming you’re familiar with agile technologies otherwise known as Scrum. When you start applying Scrum or agile technologies to your business using 80/20 on the 80/20, the results are just unbelievably magical. You can do it in every single industry that exists.
I’m actually on this path right now, where I’m trying to get agile consultants to stop looking at software and start looking at the wider world because what they could do will be worth way more to the wider world than software and they will get paid a whole lot more [laughter]. The value will be a whole lot more.
It’s sort of like talking to accountants about getting rid of hourly billing.
Perry: Oh, yeah. No, that makes perfect sense.
Well, you’re exactly right. And so, yes, there’s levers, inside of levers, inside of levers. There’s no end to it like it just keeps going and going because 80/20 is fractal. There’s a pattern, inside a pattern, inside a pattern, inside a pattern. You can just keep going and you can find smaller and smaller levers that swing bigger and bigger doors. I’ve been doing this at 20 stuff for 15 years, and it never ceases to be—
Josh: You’re the master.
By the way, if anybody’s listening and you get a chance to go on one of Perry’s seminars, you really need to take him up on it because (a) he’s a really good speaker and (b) the information will keep you busy for about four or five years afterwards.
Perry: [laughs] Absolutely. We will feed all kinds of happy juice, and information, and knowledge into your brain. And then, you can profit from it. Yes, free.
Josh: By the way, full disclosure, I’ve been to a bunch of his programs. I’m a subscriber to one of your programs. I don’t know what the name of it is but I am.
Let’s go into network effect. That’s another big deal. What do we need to know about network effect?
Perry: There’s been a huge shift from the 20th to the 21st century. It has changed the fundamental definitions of competitive advantage. And so, there’s 20th century competitive advantages and there’s 21st century competitive advantages. They’re quite different.
20th century competitive advantages are things like manufacturing capacity, and distribution channels, and TV, and radio, and minds, and legislation. All these kinds of things, they create barriers to entry for other companies. General Motors has a competitive advantage because not everybody can just stick a pencil behind their ear and build a billion-dollar automotive plan, right?
Josh: Yeah, that’s pretty true.
Perry: Okay. So, those are 20th century competitive advantages.
The biggest 21st century competitive advantage is something that only existed in a limited way in the 20th century. It’s called network effect. Network effect is when more sellers on eBay attracts more buyers on eBay, which attracts more sellers on eBay, which attracts more buyers on eBay, which attracts more sellers and you end up with – well, if you’re doing auction sites in the manner that eBay does, you would never be able to create a second eBay and ever get it off the ground, because there’s no sellers to attract the buyers and there’s no buyers to attract to the sellers. And so, eBay keeps them both.
Bob Metcalfe, who is a friend of mine, he’s the inventor of ethernet. He coined the term network effect. He said, “The value of a network is equal to the number of members squared.” So, if eBay has 10 million users and it goes to 20 million, the value of eBay is 4X not 2X because the bigger it gets, the harder it is to compete with it.
Well, Uber runs on network effect because riders attract drivers which lowers the wait time, which attracts drivers, which attracts riders, which lowers the wait time, which attracts riders, which attracts drivers. It’s this virtuous circle.
Facebook works on network effect. Instagram does. Snapchat does. Google does. Once a network has gotten going and it’s the biggest in its niche, it’s almost impossible to take down. It’s almost impossible, frankly, to even compete with. Can you imagine starting a ride-sharing service now?
Josh: No, but our friends at Lyft did it.
Perry: Well, Lyft did it. But think about it, you’ve got Uber and Lyft and they’re both viable. There’s really only two. There’s the taxi app—
Josh: I think there’s five or six. I see a whole bunch at the airports but it’s only Uber and Lyft that count.
Perry: Right. Only Uber and Lyft are literally all over the world, right?
Perry: Okay. Now, compare that to the automotive industry which is based on 20th century. How many automotive manufacturers can you think of? Well, there’s Daihatsu. There’s Hyundai. There’s Suzuki. There’s Ford and Chrysler. There’s a long list of automotive because automotive is a 20th century industry but Uber is a 21st century industry.
And so, this is the thing that I talked to my customers at a high strategic level when I have high-end clients, when I have people in coaching that have significant businesses or startups with high potential, what I’m always counseling them to do is look at literally a dozen different aspects of network effect and design their business to take advantage of it, because it makes companies insanely valuable – insanely.
Josh: Let me ask you something. I’m working on something which actually you can give me some advice on or just your comment on. I’m in the industry of consulting and financial planning which is typically done on a one-to-one basis. Both industries seem to be sort of stuck there, although there are some people in coaching who have figured out one to many. They are magnitude more successful than the one-to-one, folks. I mean, you’re one of those folks, you have lots of one-to-many programs.
Perry: Yes, I do.
Josh: So, if you’re in business and you’re working on one-to-one, and you go one-to-many, even though your price is much lower per unit you’re dealing with, the value of what you can receive from that is so significantly better, bigger that if you’re in the advice business of any sort, your challenge is to go from one-to-one to one-to-many. Does that make sense?
Perry: Yeah. Well, I think many times that’s true. One thing that I want to say about that is it also increases the perceived value of your one-to-one.
Perry: Most people in a knowledge expertise business are going to do one-to-one but how about that be just the top of your pyramid?
Josh: You see, that’s where 80/20, of 80/20, of 80/20 comes in. If you have a membership program, that’s your first 80/20. Your next 80/20 might be a mastermind program. Your next 80/20 might be one-on-one coaching where you’re probably 80/20 between that. So, basically, you’re talking about 1% of your tribe is going to want to pay you stupid money to work with them one-on-one?
Perry: Right. It’s not even stupid money. It’s smart money for them because they can get the value out of it, right?
Perry: And so, you want to match what you charge to the value that somebody can get.
Some of our programs, we turn people away because it’s like, “You shouldn’t be writing me a check for $20,000 at this point in your business. We should be helping you at a $1,000 kind of level. Here. You go over here and do this.” You know, there are people I won’t take their money. They get to a certain point. It’s like, “Okay. No problem. You know, I have other clients where they’re paying us six‑figure consulting fees.”
I just think you have a much better relationship with your customers when you can sensibly make those matches. You even have, I think, a higher satisfaction in the long run because there’s a lot of people they’re running around with their umbilical cord in their hand looking for somewhere to plug it in. There’s a lot of people, they’ll just take their money, and two years later, they’re regretting “Wow, I shouldn’t have given that person $35,000.”
Josh: I’ve done that more than once in my life [laughter].
Josh: And so [laughs].
So, Perry, unfortunately, we are out of time. Boy, this went by fast. I would love to have people contact you. So, how do they do that?
Perry: Go to sell8020.com, it’ll take you right to our website where I sell 80/20 Sales and Marketing for a penny plus shipping. You get a few extra videos that you wouldn’t get if you bought it on Amazon. You can watch how our sales choreography works. I think it’s very instructive. You can see– look at what happens when after you buy the book. Well, what happens after that? What happens after that? What happens after that? How do we communicate with you via email? What kind of messaging do we put out there? I think there’s a lot that you can learn from that. The book will change your life, you’ll never see the world the same.
Josh: Yeah. It’s a great book.
What was that website again, Sell8020?
Perry: Sell8020.com. That’ll go right to our 80/20 book page. You can look around and see other stuff. Definitely, definitely read 80/20 Sales and Marketing.
Josh: Cool. I also have an offer for you, too. I wrote my first book this year.
Perry: You did?
Josh: I did. Yeah.
It’s called Sustainable: A Fable About Creating a Personally and Economically Sustainable Business. I am, sort of, of the opinion that many people like you may not like to read how‑to books so I wrote a novel. It’s about a very dysfunctional family. There’s parts of it I hope you recognize yourself in—
Josh: –not the whole thing because all business owners I know are sort of dysfunctional at some level, including me.
Perry: I’m dysfunctional. I’ll claim that.
Josh: It’s kind of fun. It’s easy get. Just go to www.sustainablethebook.com. I also have some bonuses there. You get a free 20-minute coaching call with me. I wrote a 38-page how-to guide because, in the book, we just go through the stuff. Instead of having you figure it out, I gave you a how‑to step-by-step.
This is Josh Patrick. You’re with Perry Marshall. You’re at The Sustainable Business. Thanks a lot for stopping by. I hope to see you back here really soon.
Narrator: You’ve been listening to The Sustainable Business podcast where we ask the question, “What would it take for your business to still be around a hundred years from now?” If you like what you’ve heard and want more information, please contact Josh Patrick at 802-846-1264 ext 2, or visit us on our website at www.askjoshpatrick.com, or you can send Josh an email at email@example.com.
Thanks for listening. We hope to see you at The Sustainable Business in the near future.