Posts

Golden Goldfish Book Excerpt – Pareto and a Pea

The following is an excerpt from the upcoming book, What’s Your Golden Goldfish? (available on Amazon May 1st):

golden goldfish cover

Chapter 1

THE GOLDFISH AND THE PEA

“The law of the vital few and the trivial many.” 

– Joseph Juran

The setting is Paris 1848. A boy is born of an exiled noble Genoese family. His father, Raffaele was an Italian civil engineer who had fled Italy like other Italian nationalists. His mother, Marie was French. Enthusiastic about the German revolution that year, Raffaele and Marie named their son Fritz Wilfried.

Fritz would become Vilfredo Federico upon his family’s move back to Italy at age 10. He would grow up to become an engineer, sociologist, economist, political scientist and philosopher. During his life he would make several important contributions to economics, particularly in the study of income distribution and in the analysis of individuals’ choices.

His legacy as an economist was profound. Vilfredo’s books look more like modern economics than most other texts of that day: tables of statistics from across the world and ages, rows of integral signs and equations, intricate charts and graphs. {Endnote 2} Partly because of his work, the field of economics evolved from a branch of moral philosophy, as practiced by Adam Smith, into a data intensive field. Vilfredo is credited with helping to develop the field of microeconomics and was also the first to discover that income follows a distribution.

vilfredo paretoBut just over a century ago Vilfredo would stumble across an idea that would change the course of history. This revelation would come from a simple observation in his vegetable garden. Vilfredo noticed something peculiar about his pea pods. This insight turned into action. He decided to pluck all of the pods off the plant. He opened each and made an interesting discovery. Vilfredo found that 80% of his peas came from a mere 20% of his pods. This intrigued the 59 year-old Italian economist.

Soon he was applying this ratio to other socioeconomic scenarios. You may now recognize his last name. His full name was Vilfredo Federico Damaso Pareto {Endnote 3} and his most famous finding was that 20% of the people in Italy owned 80% of the land.

Pareto’s discovery and contribution was largely unheralded until two decades after his death. During World War II, social scientist Joseph Moses Juran uncovered his work while streamlining shipment processes for the Lend-Lease Administration in Washington, D.C. Juran was the first to coin the phrases, “Pareto’s Law of Unequal Distribution” and the “80/20 rule.”

Pretty soon Juran was applying the rule to a number of scenarios. Here are a few of his findings:

  1. 80 percent of the World’s GDP is controlled by 20 percent of the people
  2. 80 percent of the complaints come from 20 percent of the customers
  3. 80 percent of a company’s sales come from 20 percent of the products

The Vital Few

Juran’s most important application came within the field of quality control. He noticed that the majority of defects came from a small percentage of the total causes. Juran famously referred to Pareto’s principle as, The law of the vital few and the trivial many.

Juran pioneered the quality movement. His work is credited with spawning the six sigma and lean manufacturing philosophies. It was Juran that traveled to Japan in the 1950’s, giving a number of lectures that were responsible for igniting the Japanese quality manufacturing movement.

According to The Economist, {Endnote 4} since Juran’s original research, “Everyone from Xerox to the IDC and even the United Nations have tested Pareto’s Law, and found that within a tolerance of 5%, the 80/20 rule works just fine across a range of cause and effect scenarios.”

The 80/20 rule was recently popularized by Tim Ferriss’ book, The Four-Hour Work Week. {Endnote 5}  Ferriss suggests “firing” the 80% of customers who only bring in 20% of overall sales. His rationale is that it gives you more free time and allows you to focus on your most profitable customers.

Of all the applications of Pareto’s law, here’s three of the most important in the context of the Golden Goldfish,

  1. 80% of your profits come from 20% of your customers
  2. 80% of a company’s sales are made by 20% of its sales staff
  3. 80% of new business comes from 20% of your existing customer base

Are all customers and employees created equal?

When talking about how to invest our time and resources in the fields of customer experience and employee engagement, the answer should be clear. In the spirit of Juran and Pareto, we should be focusing on the vital few. My first two books, Purple Goldfish {Endnote 6} and Green Goldfish {Endnote 7}, explored the “little extras” you do for all customers and employees. The underlying premise is that you standardize these programs across your entire workforce and customer base. While these efforts are important for establishing differentiation and improving overall culture, they are probably not the most efficient use of resources.

Multipliers and Superconsumers

For the majority of businesses, 80% of profitability will be generated by 20% of customers. These folks are your “vital few.”  Similarly, not all employees are created equal. 80% of the value generated in a business typically comes from 20% of employees.

In the book, Multipliers: How the Best Leaders Make Everyone Smarter, {Endnote 8} Liz Wiseman and Greg McKeown showcase how great leaders (multipliers) get more from their employees. These multipliers stretch the abilities of their team to achieve results that exceed expectations. The opposite of a multiplier is a diminisher. Diminishers focus on themselves and drain the intelligence out of others.

Doubling down: You want Multipliers

In the words of author Liz Wiseman,

“Multipliers don’t just get a little more from their people, they get vastly more. When we asked people how much of their capability, their ideas, their energy diminishers got from them versus multipliers, we found that diminishers on average got 48 percent of people’s brainpower. Multipliers on average got 97 percent. So you can actually double the brainpower of your organization for free. You don’t need additional resources to potentially get twice the capability out of the staff you already have.”

The same concept that applies to leadership can be applied to customer experience as well as employee engagement.

Let’s look at the five disciplines of Multipliers through the lens of the golden goldfish:

1. The Talent Magnet – Are you creating an environment that’s conducive to retaining your top customers and employees?

2. The Liberator – Do you bring intensity to your work that keeps top customers and employees on top of their game?

3. The Challenger – Are you finding creative ways to stretch the capabilities of your top customers and employees?

4. The Debate Maker – Are you speaking last? Finding ways to engage top employees and customers into decision-making and product development processes.

5. The Investor – Are you allowing top customers and employees the opportunity to own key segments of a program or initiative?

Advocacy Works

According to Rob Fuggetta in the book, Brand Advocates, “92% of people trust recommendations from friends and colleagues. {Endnote 9} Yet, only about 30% trust online advertisements.” He admittedly may be a little biased. Fuggetta’s company Zuberance offers a software solution that helps brands leverage recommendations from their advocates. Nevertheless, based on NPS research, over 50% of consumers indicate that they are highly likely to recommend companies they do business with or a product they’ve purchased. You need to ask, “How are we leveraging our enthused customers?” 

CASE STUDY – METHOD HOME

Show More Love

True advocacy is not for sale. But you can do the little extra by showing more love to your best customers.

For example, Method {Endnote 10}, a leader in organic home cleaning products, is leveraging advocacy with its most passionate customers. It has created a group of 5,000 consumers it calls cheerleaders.

To qualify as a cheerleader, these customers have done something extraordinary to share their love for Method. Things like writing a poem or creating a photograph. One cheerleader Nathan Aaron has even created a blog called Method Lust – One Man’s Surpressed Lust for All Things Method Home {Endnote 11}. Over a five-year period, Aaron penned almost a 1,000 articles about Method. Nathan isn’t paid by Method, although he sometimes receives new products, notes from the team, and even an invite to dinner when the Method team is in town.

Enter Superconsumers

All customers are not created equal. In a recent article in HBR {Endnote 12}, Eddie Yoon, Steve Carlotti, and Dennis Moore discuss why its important to distinguish what they call “superconsumers” from other segments of buyers. More than just heavy users,

Superconsumers are defined by both economics and attitude: They are a subset of heavy users who are highly engaged with a category and a brand. They are especially interested in innovative uses for the product and in new variations on it. They aren’t particularly price sensitive. Superconsumers tend to have more occasions and “jobs” for a product. Think about hot dogs: While many consumers view them primarily as a food for backyard barbecues, superconsumers see them as an ideal fast meal or an after-school snack.

CASE STUDY – VELVEETA

Leveraging Pareto’s Law, we know that 80% of profitability is generated by 20% of customers. Yoon, Carlotti and Moore bring this to life with the example of Kraft Velveeta cheese. The top 10% of Velveeta buyers account for over 50% profit. Kraft focused on this key segment of 2.4 million superconsumers. The results are anything but cheesy. New product spin-offs totaling over $100 million in additional sales has been game changing. It has shifted a paradigm for Kraft. According to marketing director Greg Gallagher,

“The previous thinking was that the quickest, easiest path to growth was to identify light users or lapsed users. But when we talked to superconsumers, we learned that in fact they wanted to use Velveeta more—they were starving for it.” 

TAKEAWAY: All customers and employees are not created equal. Do more for your best ones. In the words of Yoon, Carlotti and Moore, “Show the love to those that love you the most.”

The Bullseye

These employees and customers are your vital few. You don’t treat everyone the same, you treat everyone fairly.

employees first customer second top last

Imagine a round target like on an archery range. The outer ring is employees, the middle ring is customers and the bulls-eye is top customers / employees. Start on the outside and work your way into the center.

Are you willing to achieve more by doing less? Ready to count your peas? Let’s find out what’s your Golden Goldfish.