Perry Marshall - What Does the Pareto Principle Have to Do with Business Value?
Perry Marshall is the author of the book called 80/20 Sales and Marketing. In this book, Perry helps you understand that the 80/20 rule is fractal, meaning it’s a repeating pattern where the smallest parts resemble the whole. So, inside every 20 percent is another top 20 percent. And that is where Ed wants to focus on this podcast.
In this episode, Perry and Ed dug into how business owners can build value using this parade of principles. Let us listen to one of the most expensive business strategists and one of the most sought after consultants talk about business investing, what he looks for in businesses, and how he takes underperforming businesses and adds his 80/20 principle to the business that amplifies the overall value.
Enjoy this episode with Perry Marshall!
1:55 – Who Is Perry Marshall?
9:45 – You Have to Understand Your Business In Order to Sell It
12:29 – The One With The Upper Hand Is Not Necessarily The Person With The Money
18:43 – What Is The 80/20 Principle
27:26 – Where to Start to Identify The 20% That Will Cascade Everything Else
30:29 – How To Get Over The Fear Of Losing Money
38:45 – How To Make The Transition From “I Am the Business” to “This Business is an Investment And Should Be Treated As Such”
42:14 – Piece of Advice That Has The Most Impact On Business Value
42:37 – Connect With Perry Marshall
43:31 – Evolution 2.0
Who is Perry Marshall
About 20 years ago, Perry got laid off from his engineering job when his wife was three months pregnant. He could not stay in the same specialty without moving from Chicago, and so he went into sales. Having seen a lot of sales guys visit him in his engineering job, Perry thought going into sales is a piece of cake. And obviously, he was wrong.
He went through two years of pounding pavements, pounding phone directories, trading through gatekeepers, seeing people who didn’t want to see him, adding tons of miles on his car, getting skinny commission cheques, and working on projects that suddenly renege at the last minute. At that point, credit cards are up to their eyeballs. Things started to fray and break.
Then Perry discovered direct marketing.
He went to a presentation that Dan Kennedy gave, and he learned that there is a whole world of copywriting and direct response marketing, mailing lists. He suddenly understood that there was an entire world where business gets done without anybody talking to anybody. And this was just before the Internet was about to hit. And it turns out, whether most people realize it or not, most of what works on the internet when it comes to selling stuff, actually comes from the direct mail and catalog businesses of the 20th century. That was a very well-developed science even though nobody paid any attention to it back then. Perry discovered that world. He found that he could take pieces of that world, bolt them onto the front end of a business-to-business sales organization. He could take elements of direct response marketing, and whether it was direct mail, value-packed coupon, or Google Ads, or Facebook Ads, or emails, etc. that he could get people to steadily and reliably come to him instead of him chasing them.
One of the things that made Perry’s sales career particularly painful was that he was a naturally consultative person. He was not the kind of guy who can walk into some business and start slapping people in the back and telling jokes and get them to buy stuff. He doesn’t feel like he belongs there unless he can solve a problem and use his expertise, education, and resourcefulness.
You Have to Understand Your Business To Sell It
What happened was a couple of switches that fell into places for Perry. One of them was him being fired from his job after two years, and the other one was being able to find another job fairly quickly. This was in 1997.
In 1997, most people weren’t using the Internet. Perry’s new job was selling engineering stuff. They have a very primitive website. Then they discovered that if they put good quality problem-solving information in front of people, they could generate leads, and they could get people to fill in the form and say, “I would like to know more.” And because they had come to Perry instead of him chasing them, Perry was in a much better position. People would ask him questions and assume that he probably has the right answer, and so Perry could be the consultative salesperson.
Their company then started creating boot camps and workshops to give people quality education about the industrial networking stuff that they’re selling. They began coordinating activities with trade organization for the industry, etc. And they became the master org. They were the smallest company in their space – a $2M company in a business where most of the players were $50M or even $billion companies, but they were putting so much quality information in the marketplace and positioning it so well that they looked ten times bigger than they were. People would come to their workshops, listen to them, and read their magazine articles. They positioned themselves as experts.
The One With The Upper Hand Is Not Necessarily The Person With The Money
One thing that you will find is that in any sales transaction, somebody has the upper hand, and it’s not $10M necessarily the person with the money. Let’s say your net worth is, and you just found out that you have pancreatic cancer. Does having $10M give you the upper hand?
If you have a lot of money, but you still don’t know how to solve your problem, or you don’t have a reliable person who can solve your problem, then the reliable person who can prove that they’re reliable still has the upper hand.
A lot of times entrepreneurs, marketers, salespeople, they are so used to having the short end of the stick. In actuality, they’re sort of afraid to have the upper hand. Perry emphasizes that you need to have the upper hand. He cannot help his clients unless they respect him.
Perry once had a conversation with one of his gurus, John Carlton, about 15 years ago. Perry was then a freelancer doing projects. He was doing okay, but he knew he needed help. And so he bought a coaching package from a guy so he could reach out to him and ask him questions. Perry got into a tiff with a client back then over how they are going to do their website, and so he emailed his coach about it and said, “well here’s what’s going on.” and his coach emailed him back and went, “you did all of that for $3000?” He said, “Perry, if I was doing that, I will charge him at least $15000.” He said, “Listen. If the CEO’s hand is not shaking when he writes you the cheque, you’re not charging enough, because Perry, you are not a mouth in the food chain; you are the food chain.”
It likens back into a conversation he had with he was sixteen. He went out for coke with one of his friends’ dad. Perry didn’t know that much about him back then and it turned out that he was a management professor at a local university. He was the highest-paid professor in the entire university. And this was in 1986. He said, “Perry, I do consulting on the side and I charge $3000 to $5000 a day.” Perry got a shock listening to that because his dad doesn’t even make $5000 a month. He explained that he did not charge that amount of money because he needs money because he got plenty of money. The reason he charges that much money is because when a CEO is paying you $3000 to $5000 a day to tell him what’s wrong with his company when you sit down and tell him, he takes notes. It’s all about positioning authority, trust, and respect.
In the business of buying and selling companies, it’s even more critical because companies are bought and sold for just as many weird and bizarre and varied reasons as people buy and sell their cars or their house, or their boats. If you want to make the best that you can out of a situation, you need authority, you need positioning, and you need people to believe you’re the expert. And that’s the game you’re playing.
What Is The 80/20 Principle
The 80/20 is much bigger and more profound than most people ever think. Probably, most people, somewhere along the way have heard the story about the Italian economist, Vilfredo Pareto, who figured out, in every country he studied, 20% of the people had 80% of the money, 20% of the people owned 80% of the real estate. And it didn’t seem to matter whether they said that they were capitalist or socialist or communist or whatever. Inequality always seems to be about the same.
Probably, a lot of salespeople have heard that 20% of your customers give you 80% of your sales. That’s true, but it’s way more significant and way more profound than that. Most people think that it’s just a business rule of thumb. Or just this weird ratio, which happened to be the case. But, NO. It is the fundamental law of cause and effect. It’s just about every spreadsheet that you can make about a business or marketing or advertising. It’s also things about the rabbit population, or the size of craters on the moon, or the traffic on the streets of your town, or how busy the airports are, all of these things are 80/20. 20% of the roads have 80% of the cars. 20% of the sand in the bucket takes up 80% of the space in the bucket; this is true all over the place. But, furthermore, it’s fractal, which means there’s 80/20 in every 80/20. So, 20% of the road has 80% of the cars. And 20% of 20% of the road have 80% of 80% of the vehicles. So, 1% of the roads have 50% of cars.
There this pretty simple math formula that says, whether we’re talking about product defects or customer support tickets, or shoplifting in your store, or problem employees, or high-performance employees, or which number factors in business operation affect profitability, all of those things are 80/20, and all of those things are 80/20 squared. All of those things are 80/20 cubed.
To put it into perspective, if you found a tipping point where if you can get the profitability above the threshold of 20%, it overwhelmingly increases the likelihood of the business getting sold. That’s not true because of the number of 20. If you were in specific industries, certain industries might be lucky to have a 5% profit margin, and you sell the business all day long at 6%. It’s not the number 20.
If you were in specific industries, certain industries might be lucky to have a 5% profit margin, and you sell the business all day long at 6%. It’s not the number 20. It’s the top 20% of the profitability of all the companies under consideration. If the average profitability was 15%, the 50th percentile puts you in the 15% profitability, then being 20% profitable puts you in the 80th percentile. 80th percentile is the dotted line between the haves and the have nots. Let’s go to Vilfredo Pareto a hundred years ago when he figured this out: 20% of the people have 80% of the people have 20% of the money. That means the haves have 16 times more money than the have nots. And it’s true. The businesses that are selling are 16 times easier to sell than the companies that are not selling. It’s true in the profit margin of what makes the business sell. It’s true in a Facebook account of which posts make comments and shares and which ones didn’t. It’s true in product defects.
Where to Start to Identify The 20% That Will Cascade Everything Else
Most businesses are losing money on 5 or 10% of the product they sell, or 5 or 10% of the services they provide, 5 or 10% of the customers and clients they serve… To give an example, Perry shared about that time, he gave a key-note speech to a room full of CPAs. He asked the audience, “How many of you got a client who pays you 300 bucks (not a lot of money), they called on April 13, and they got this giant shoebox of receipts. And they send you 872 emails, and they can’t get themselves together and you’re filing all these extensions, and then in the middle of June, they finally get their stuff together?” all the hands go up. He said, “Today, we were going to change your life. I, Perry Marshall, best selling author, 80/20 expert, permit you to fire that client.” No law in the universe says you to do this guy’s taxes. No law in the universe tells you have to take his business. And you don’t have to be mute about it. You have to send him a letter, “My board of directors had a meeting this week and we’re changing our directions a little bit. We are not going to be able to serve you this year and so we will help you transition to a different tax firm.” The minute you did that you lost $300 but you gained 20 hours.
How To Get Over The Fear Of Losing Money
Taking into the example above, some entrepreneurs might think, “You know what, it takes a lot for me to hold on to that. And I’m scared. I don’t want to lose that.”
Perry explained that you are losing money by taking that guy’s business because CPAs should not be making $15 an hour. Perry thinks a CPA ought to be making maybe around a $100 or $200 or more an hour. If you’re doing 20 hours of work for $300 tax return, you are not doing stuff that’s worth a thousand dollars an hour.
Here’s the way work is; there’s $10 an hour work like emptying the wastebasket, mowing the lawn, and going for office supplies, stuff like that. Then there’s $100 an hour work which is solving a problem for a customer, answering the phone responsibly… Then there’s $1000 an hour work which is figuring out where you can get the sources of new clients, negotiating and closing deals (which many times at least $10000 an hour work), rethinking the way that you work the business in your business and improving flows, making sure, for example, that if a customer calls they don’t get put on hold. If you spend the next week just solving that problem, that’s $1000 an hour all week long. But you’re not doing it if you’re mocking around with some guy who can’t get his receipts together. Yes, people like to hold on to stuff, but 80/20 is more about what you say NO to than about what you say YES to because what you say YES to is often Chaos Theory.
Perry said that most people are so addicted to the busyness that they trick themselves into feeling good getting $300 working 20 hours on a tax return. According to him, you are much better sitting on a park bench watching the geese and doing nothing than doing some guy’s taxes because at least you are meditating, calming yourself, not having anxiety, and living your life.
To dispose of the fear to let go of the $300 tax return, you need to exercise what Perry calls “faith in 80/20 as a law of nature”. 80/20 guarantees you that 5 or 10% is driving you backward. It is losing you money; it is moving you backward in your career and your business. It’s like cement shoes. At least five o 10% of what you’re doing is counterproductive.
Furthermore, 50% of what you’re doing is accomplishing very little, and only 20% of what you’re doing is moving the needle. It’s a law of nature that this is true. Now, if you are smart about it and if you are aware of it, what you do is you start to be ruthless about the stuff that is not moving you forward and was holding you back. And you begin lasering in on where are the levers. Here’s an example of the lever: Dentist office, phone rings, Helen picks up the phone and puts the person on hold, transferred the caller to another person who again put him on hold, the caller hangs up. That person was ready to spend $15000 on dental work, but then a circus happened. If they were going to spend $15000 and with 5 minutes of hold music and they lost the sale, then how many dollars an hour did that Dentist office lose? A tremendous amount of money was lost in a concise period by a process that will never be entirely right unless somebody focuses on it.
If we’re going to take our 20 hours and get a system in place so that Helen could never just put somebody on hold and lose a $15000 sales. If we fixed that and all of a sudden Chaos Theory when one of those sales was captured two and a half weeks later. A well-run dental practice that’s running on all cylinders can be very profitable. That phone call where Helen dropped the ball that is an 80/20 lever. That is 1% of the phone calls that produce 50% of the revenue. You don’t know when it is going to come and it’s got to be handled right.
How To Make The Transition From “I Am the Business” to “This Business is an Investment And Should Be Treated As Such”
Transiting from “I Am the Business” to “This Business is an Investment And Should Be Treated As Such”, you may be able to do that completely or you may only be able to do that partially. Let’s say you can only partially do that. Let’s say you’re a cosmetic dental surgeon and you’re one of the best in the country and so you can entirely get the business to run on itself. Here’s what you can do; you can get rid of the $10 an hour work, the $100 an hour work, the $1000 an hour work, and only do the $10000 an hour work.
You have to become exquisitely mindful of how much is the thing you’re doing right work worth per hour. If you start asking that question in a year, you’ll automatically be way closer to the ideal that you are just talking about right now.
Piece of Advice That Has The Most Impact On Business Value
What are you going to NOT do? Most entrepreneurs are YES people and that’s why they’re where they are. What are you going to say NO to?
Decide what you’re going to say NO to, decide what you’re going to cut, determine what you’re
Connect With Perry Marshall
Visit www.sell8020.com to know more about Perry Marshall and his book 80/20 Sales & Marketing.
Perry gave a brief description of his other work – Evolution 2.0.
In May 2019, Perry went to the Royal Society in Great Britain and announced the largest fundamental science research in the world called Evolution 2.0. They are looking for an answer to the questions; What gives life its spark? Where did life come from? Where is the information that makes life work come from?
This begins 15 years ago when Perry went to visit his younger brother who was a missionary in China. When he got there, he found out he doesn’t believe in any of that stuff anymore, he’s no longer a missionary, he’s moving home, and he’s almost an atheist. It set Perry down a deep science rabbit hole to figure out what questions do we have the answers to and what problems we do not have the answers to.
Fifteen years later there’s a book, there’s a technology price, and if you wonder like where did it all come from and where is it all going, you can visit www.evo2.org to get FREE three chapters of Perry’s book to find out where that adventure proceeded.