Due in part to the tyranny of the spreadsheet age, business planning is often too numerical and doesn’t take into account the vagaries of human behavior. How many companies over-hire salespeople because the spreadsheet-based model shows quite clearly that more salespeople leads to more revenue?
But this is not how organizations work. Many of us have heard of the “80/20” rule – that being that 80 percent of your business will come from 20 percent of your customers. This is an example of the Pareto Principle at work. Pareto wasn’t thinking about sales teams at the time he wrote about it. He was an Italian economist who noted in his era that 80% of the land in Italy was then owned by 20% of the people. The Pareto Principle generically holds that 80 percent of the effects come from 20 percent of the causes.
The 80/20 rule has since been applied to a number of situations. It is a helpful heuristic when thinking about your business. Here’s an example from the retail banking industry – and area of banking where profitability it concentrated among a small number of customers:
Only about 20% of your customers are driving 80% of your profits. Another 20-40% of your customers account for the remaining 20% of your profits. And the most shocking fact of all is that 40-60% of your retail banking customers are unprofitable.
The Pareto Principle is an example of asynchrony – where results are not linear but instead are concentrated among a small percentage. This principle is equally(!) at play in Price’s law. Named after British scientist David Price, it holds that “50% of the work is done by the square root of the total number of people who participate in the work” (excellent article here).
I have noticed in my career that a concentration of results come from a small number of people. These superstars can be found in all organizations, and in many cases might evade detection if you’re not measuring results. It’s easy to see this at play in sales organizations, where it is rare for every sales person to finish the year at 100% of their assigned sales objective. Instead, the two 300% achievers “pay” for the four colleagues who end up below 100%.
I have the sense that this asynchrony in sales can be misinterpreted and over-emphasized since managers don’t properly factor in territory value. I have seen this cycle at play in my past:
- Salesperson assigned to lucrative sales territory.
- Salesperson is very good and has a great year 1, delivering 200% of his/her target.
- Company views salesperson as “Amazing, Talented Salesperson” and assigns more territory since they expect they will see more results.
- Salesperson delivers 300% of objective in year 2, and threatens to leave the company unless this or that comp plan/territory demand isn’t met.
- Management, believing this Amazing, Talented Salesperson to be a vital part of their results, caves in.
- Salesperson ends year 3 at 400%.
These sorts of situations crop up from time to time and cause companies to misinterpret the reasons for the asynchrony. But with that having been said, asynchronous results are a fact of business, and spreadsheets don’t even try to capture them – they only hope to account for them in the average (the business forecast is met at 100% even though there is an uneven distribution of achievement in the team).
- Understand that we are surrounded by the impacts of unequal input and distribution. Note that our economic system now captures this asynchrony in ways that are leading to more income disparity.
- If 80 percent of your growth opportunity next year is represented by 20 percent of your current customers or prospects, how are you applying your resources to maximize your results from that specific group? Stop what you’re doing and think about this.
- Identify the reasons why someone who is driving outsized results is doing do. It amazes me how infrequently we look back on why certain results happened. We’re too busy day dreaming about the future when the tools for future results are often laying right under our nose.
Your results aren’t linear. Price and Pareto know this, and you should as well.