How Price’s Law Applies To Marketing

4.9
(11)

Does Price’s Law Mean Most of Our Marketing and Business Efforts, Time and Money Could Be Wasted? Do Just a Handful of Tactics or People Contribute 50% of Our Success?

Sometimes it seems like a handful of people do most of the work in an organisation. It’s not your imagination. According to Price’s Law, based on the work of Derek J. de Solla Price, a handful of people do most of the work in many situations. Price first noticed it in terms of publications. He noticed that 50% of publications were written by the square root of the number of contributors. And it looks like it applies to other areas of work. Let me give you an example

According to Price’s Law if you have a sales team of say, 25, then 5 of them will make 50% of the sales. Five being the square root of the 25 sales people.

Of course it isn’t an invariable law. There will be a bit of variation depending on circumstances. It might be four sales people delivering 48% of the sales or 6 of them delivering 53% of sales. But the rule applies, at least in rough proportions, in many situations. And I contend it applies in marketing and that we can bend it to our advantage by applying a similar concept, the Pareto Principle, to our business.

The Pareto Principle

Pareto Principle. The 80:20 Law
The 80:20 Law

The Pareto Principle is named after Vilfredo Pareto who determined that 20% of what we do tends to deliver 80% of the output. For example 80% of your sales may come from 20% of your customers. Or 80% of your marketing success may come from 20% of your marketing effort. So the Pareto Principle isn’t the same as Prices Law but they are both examples of law of the vital few or what is sometimes called the principle of factor sparsity.

In both the above cases we can see a few people, customers or factors lead to a disproportionate output.

Imagine what might happen if we combine Price’s Law and Pareto together. If we get our most productive people using the 20%. Of course they may already be doing that . It might be exactly what makes them perform in the top echelon. Our top sales people may have recognised who spends most and focused on them.

But if they aren’t focusing on the top 20% of buyers or using the best channels think how much further they could improve.

And if you are able to roll out the best practice to all your staff think how they can improve performance. Marketing is rarely down to one factor. It’s mixing several high performing factors together that matters. And if any step in the process fails then its like having a weak link in the chain. For example it’s no good if you do great marketing but, as I discovered when visiting a new client, the system failed because the phones weren’t answered (partly due to a technical issue which meant they didn’t ring).

Examples of Price’s Law in Marketing and Business

For 15 years I owned a website that ended up with over 1000 pages and posts. Many of these pages and posts were fairly short and concise. In some cases they consisted of only a few hundred words and in a few cases just a few dozen words. Being so short and not digging deep into a subject it is hardly surprising that they didn’t get much search engine traffic. In fact some of these pages didn’t ever get search engine traffic (don’t confuse this with them not being useful pages to the people that went direct to them from my emails and social media).

But two pages each received 5000+ visits a year from search engines. They dealt, in depth, with topics that people searched for. Being of high quality they were on Page One of Google and received a lot of clicks every day. These pages went far beyond Price’s Law and were 1 in 500 pages. Even if I’d removed all the other pages my site would have received a lot of traffic from these two pages alone.

And of course I had a good number of other pages that received a hundred or more visits from search engine traffic each year. Around 90% of my total traffic came from a handful of pages. This result was better than Price’s Law but we have to remember Price’s Law is not invariable. In aggregate it is quite accurate but there are extremes along a continuum that deliver the square root average.

And to counterbalance this extreme I can point to many instances where things totally fail. But that’s the point in a sense. Although there are a range of results in any given situation we can strip out the outliers that don’t perform and achieve much better. And that’s where the Pareto Principle comes in.

Outperforming Price’s Law & the Pareto Principle

Most people talk about Pareto as the 80:20 Rule. And when Pareto described it this is what he seems to have focused on. But it isn’t the only interpretation. Pareto is in fact a Fractal Law. (I’m not referring to the fractal nature of the law thought his has been argued by Post and Eisen).

The Fractal Nature of the Pareto Principle

The Pareto Fractal is a Power Law Example

Take the 20% best performers in a Pareto situation and dig deep. Hidden among the 20% will be some hidden gems. Any given 80:20 example also exhibits Pareto tendencies. 20% of the 20% will also shine. It’s similar to where in my Price’s Law sales team example there is likely to be one of the 5 top sales people that outperforms the other four. This person will possibly be delivering far far more than the other top people.

You could describe this as a 96:4 Pareto Principle situation. Indeed it goes on ad infinitum.

And where you are talking big numbers of sales people, maybe in a global business, you can keep digging deeper and deeper and someone invariably outshines the others in a Pareto type way.

If Only Pareto and Price Had Been Football Fans

If Price and Pareto had lived today they would not have discovered their laws. Football would have taught them otherwise.

The reason is because football is an example of where earnings are at many levels. And so is expenditure.

Let’s look at expenditure first.

To enjoy a game of football all you need to do is go to a sport bar and buy a beer. That beer means you can watch a game.

Or you could buy a sports channel subscription and watch the game at home. The subscription costs more than the beer but the seating is likely to be better!

Alternatively you buy a seat at the stadium. It’s more costly but the atmosphere is electric.

And if you want to spend a bit more you can buy a season ticket.

If you want to entertain friends or clients, get a box at the stadium. The views are great, you’ll have drinks and food and life is good.

Have you noticed how, generally speaking, in each example the numbers participating decrease and the cost goes up. It’s a Pareto Fractal. Pareto like Vilfedo Pareto never imagined.

Football example of Pareto Principle in action
Could you purchase a soccer team?

And Just When They Thought It Was All Over

You might imagine that is as far as Pareto can take us. A box overlooking the pitch.

But of course it’s not.

You could buy the team.

That’s the Pareto Principle Top Position in this game. The Ultimate Pareto Fractal.

Pareto Fractals and other Sports

Of course its not just football where Pareto applies.

It also works in things like horse racing, cricket, rugby, motor racing , sailing, Formula One and much more.

Pareto Fractals, Price’s Law and Wages

It’s the same with wages.

There are part time people employed sweeping the stands and selling programmes. They are on minimum wage.

Then there are slightly better paid office staff.

And then the sports masseuse, sports psychologist, coach and manager in ascending orders of wage magnitude.

And then the players. Some earning huge sums and some earning obscene amounts a week. More than most of us earn in years every week. These players know their worth and demand more and more. They become an industry in themselves. With sidelines such as product endorsement that earn them huge sums. Many also create employment with their personal chefs, chauffeurs, and more.

Price’s Law and the Pareto Principle Share Common Ground

Plus we see admiring fans globally. This too creates further work and income streams

Again we are seeing the Pareto Principle in action.

If you want to discover more about how to negotiate price and wages check this post on negotiation out.

Zipf’s Law: Rank v Frequency

Price and Pareto weren’t the only people to notice how data often follows patterns. In 1949 linguist, George Zipf noticed something similar. He saw how common words were distributed in frequency. He noted that the word “the” appeared in the English language twice as many times as the next ranked work “of”, and three times as frequent as the word ” and”. Since then his law has been found to be true of things like city size. The largest city in a country is around twice the size as the second largest. And the third .. well you can guess the answer can’t you.

In 1999, economist Xavier Gabaix called Zipf’s Law a Power Law. It seems to apply in so many situations.

In fact Power Laws can be used to describe Pareto, Price’s Law and even things like the long tail words we use in SEO.

Another variation of Zipf’s Law is Lotka’s Law which is named after Alfred J Lotka. Lotka describes the frequency of publication by authors in any given field of work. The graph that describes the numbers is another Power Law example. It was probably Lotka’s work that encouraged Price in his deliberations.

Zipf also studied the principle of least effort which is important in things as diverse as information sourcing and website design.

If you want to be really great at marketing you need to understand all of the above laws and put them to work for you.

More Examples of Power Laws in Action

One of my colleagues, Lee Duncan, sees Power Laws in action on a regular basis. Here are just some of the examples he shared with me.

As a programmer in my early days, the majority of the code was written by the minority of the coders.  The majority of the bugs occurred in code written by a minority of coders (often not the same groups).

In a client with 12 sales people, 3 were top performers and sold 50-100% more than the middle performers.  The worst performer sold 10% of the best.

In my clients that have experienced high 6 into 7 digit growth in a year, it has been a single marketing channel that has done the heavy lifting.

In Adwords for a business I part-own, two keyword phrases produce 50% or more of the clicks and enquiries.  There are thousands of keywords in the account though.

In my partner Julie’s bridal business, although she carries around 100 dress styles, she takes most orders against a much smaller sub-set.  Some dresses never take a single order” *

*Does this remind you of the website example I gave earlier where some webpages never get Google traffic?

What is Price’s Law?

Sometimes called Price’s square root law it describes how 50% of the work is usually done by a small number of people. In this case the square root of the number of people involved.

There’s a lot more information in the main link above.

What is the Pareto Principle?

The Pareto Principle is named after Vilfredo Pareto who determined that 20% of what we do tends to deliver 80% of the output.

There’s a lot more information in the main link above.

Price’s Law Example

According to Price’s Law if you have a sales team of say, 25, then 5 of them will make 50% of the sales. Five being the square root of the 25 sales people.

There’s a lot more information in the main link above.

Is Pareto a Fractal?

Yes, but the explanation is long so check out the main link above for more.

What is Zipf’s Law

Zipf’s Law is about Rank and Frequency. Zipf  saw how common words were distributed in frequency. He noted that the word “the” appeared in the English language twice as many times as the next ranked work “of”, and three times as frequent as the word ” and”. Since then his law has been found to be true of things like city size.
There’s a lot more information in the main link above.

What is Lotka’s Law?

Lotka’s Law is a variation of Zipf’s Law. Lotka focused on the number of authors that dominated publications in a given field
There’s a lot more information in the main link above.

What is Zipf’s Brevity Law?

Sometimes called Zipf’s law of abbreviation the Brevity Law states that the more often a word is used the shorter it is. Eg the, and, …..
There’s a lot more information in the main link above.

How useful was this post?

Click on a star to rate it!

Average rating 4.9 / 5. Vote count: 11

Please follow and like us:
error

You may also like...