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Friday, October 29, 2010

Where IT Workers Must Go Next (Or Integrators Will Do It For Them)

By Brian Sommer | October 27, 2010, 8:17pm PDT

The nature of IT work in corporations has always been a changing lot. IT pros have had to learn one new programming language after another. They have had to migrate from batch systems to online/real-time systems to client-server systems to Web 1.0 software and Web 2.0 technologies.

But, look in the IT departments of large corporations today. Where are large numbers of IT workers doing? Many are supporting on-premise software. Some are working on their company's website and a scarce few are developing really strategic custom applications.

At lunch the other day, I listened to a friend and very cool CIO tell me how he's trying to change the culture of his IT staff. Previously, the IT team hated it when a new technology (e.g., iPad or iPhone 4) comes on the scene as they saw it as something else that they must support even though there is no budget to do so and they are already overtaxed with other responsibilities.

What my colleague is doing is instead telling his IT leaders to go buy four of these devices and do two things with them: 1) find out how to support these technologies and 2) identify some new strategic uses for these. He knows that change, even in IT departments, is still a change management challenge. As such, it needs attention if it is to occur. But he also knows that what we think of IT today is going to change dramatically very soon. The new IT will about cloud solutions and mobile technologies that deliver a whole new set of capabilities and possibilities for interconnected workers.

I relate all of this as Appirio has recently released the results of a great study on cloud adoption by large enterprises. A lot of what they discovered mirrors what I personally observed in a research study I did earlier this year on the same subject.

Some of the interesting statistics in their report are:

"59% say business agility was among their top 3 reasons to consider cloud solutions (vs. 47% for TCO reduction)

75%+ say cloud-to-cloud integration and better mobile access are important priorities (more than 80% still say security and manageability are priorities)

Only 4% have fully integrated their cloud applications with each other

Only 15% plan to execute future cloud projects using only internal resources"

(Source: Appirio, State of the Public Cloud: The Cloud Adopters' Perspective, October 2010)

The implications of the above are interesting. IT departments will have a lot of work in front of them soon if they are to provide the kinds of solutions and integration required of them. They will need to be able to connect numerous cloud solutions together as well as connect these to on-premise applications and data stores. But, what could be more jarring will be their need to connect data from these various cloud solutions to numerous hand-held and portable Internet devices that employees, customers, suppliers and other systems constituencies will use to access tomorrow's corporate data.

Do IT groups have to provide this cloud-to-cloud and cloud-to-mobile integration? In a word, Yes. For should they fail to do so, then newer integrators, like Appirio will fill the void. Re-read the statistics above for some sobering, contemplative analysis.

IT professionals have been an extraordinarily adaptive lot. This set of changes, as IT goes cloud and mobile, will really test the change capabilities of this profession. IT is entering an all-new ERA here and this change will be revolutionary not incremental.
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Thursday, October 28, 2010

Never assume an employee knows his own performance issues

Date: October 26th, 2010
Author: Toni Bowers

There's a scene in Young Frankenstein, when Dr. Frankenstein meets Igor (Eye-gor) for the first time. He motions toward the disfiguring hump on Igor's back and says, "I can fix that."
"Fix what?"
"That hump."
"What hump?"

It's my favorite cinematic example of chronic denial. In fact, when I encounter examples in real life of self-delusion, the words "What hump?" always echo in my mind.

If I were to give one piece of advice to a new manager in regard to performing employee reviews, it would be to never underestimate the self-serving bias of human beings. In other words, the worst thing you can do is to assume an employee knows what his or her weak spots are.

J. Richard Hackman, the Edgar Pierce Professor of Social and Organizational Psychology at Harvard University and author of Leading Teams: Setting the Stage for Great Performances, was interviewed for a story in The Harvard Business Review written for underperforming employees. He said, "Usually a person doesn't realize that he or she is the underperformer. We all have an amazing capability for retrospective sense-making, which allows us to rationalize difficulties as 'not my fault'."

Let's set aside all the other possibilities for an employee underperforming, such as poor management, unclear expectations, etc. Let's assume that an employee is, indeed, underperforming or has some kind of performance issue and you have to do a review. The more frequent the feedback and the more concrete it is, the more likely it will be taken constructively.

If, for example, you have an employee who has some pretty serious problems communicating with end-users, it will do no good to just say this. In that employee's mind, he will most likely rationalize that the end-users just misunderstand him. You will need to have specific examples of situations that end-users have brought to your attention. If they can provide some actual dialogue or emails that illustrate the problem, that would be even better.

If an employee has problems with time management, make note of specific instances when a deadline was missed.

In other words, if you have to address problems with an employee, expect to have to counter some basic self-defense mechanisms with objective data.
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Wednesday, October 27, 2010

Never trust a client's initial project requirements

Date: October 22nd, 2010

Author: Brad Egeland

A customer's initial perceived needs for a project often don't mesh with reality. Part of our job is to look at customers' issues and ask the right questions to find out what they really need.

How to get the actual project requirements

If a customer brings you a project that he or she has mapped out, the customer has likely already thought about implementation, technology, and possibly even how much the project will cost and how long it will take to complete. As much as you might want to jump in there and morph the customer's project wish list into the actual requirements, you need to be thoughtful about how you proceed.

Here are four steps that you can take to shape the customer's initial requirements into a real solution. You may need to modify the steps based on your customer and what your organization's processes mandate.

1: Hear the customer out

At this stage, you probably don't really know the customer's business yet, so your project team should be all ears. You need to listen to the customer's requirements and his or her wide-eyed ideas of how things are and how things should be. You should also ask questions, but don't be combative or deflate the customer's enthusiasm. It's your job to review the requirements the customer has documented for you and try to get more detail.

2: Meet with SMEs and end users

You should ask the customer to gather subject matter experts (SME) and end users so that you can interview them. After all, you need all sides of the story, right?

Before you show these individuals what you and your customer have compiled so far, find out where things stand from their perspective. Discuss the goals of the project and see if they line up with what the end users really need to do their job well. Then you can bring out what you've documented so far and show them the requirements and the potential solution and get an understanding of the gaps that still remain between what the customer thinks is needed and what the end users really need.

3: Revamp the requirements

Assuming you found more than just a small gap in the initial requirements, you must rework the project schedule, the estimate, the timeframe, and the resource plan. In order to convince the customer that he or she was way off in the original perception of the problem and the solution, you need to make as strong a case as possible (it should include solid numbers and documentation).

4: Break the news

It's time to regroup with your project sponsor or customer project team and present your findings and what you believe to be the real-world vision of the project's schedule and cost. This may be a tough sell, especially if you found a significant gap and the solution will cost five times what the customer was originally expecting.

What to do if the customer sticks to the original specs

In most instances, you can sway the customer to see the right solution for the project, but there is the possibility that the customer won't sign off on your version of the real task at hand and will require you to move forward with the original plans. If the client sticks to their guns and insists on following the initial project wish list, then you have a tough decision to make. Do you go down the customer's path, knowing you may be delivering the wrong solution? Or do you end the project right there because you know you'll never make the customer happy?

I believe that, in most circumstances, ending the relationship at that impasse rather than risking permanent damage to your reputation is usually the best path to take. Also, I think most project managers want to feel good about their work; if you implement a solution that you don't believe in, you're going to have a bad taste in your mouth at the end of that project.

Your reputation is on the line

Regardless of how tempting it might be to take the easy road and just do what the customer wants (especially if you're already juggling six projects), you should never trust a customer's initial requirements. There's almost always more to the problem, and therefore the solution, than originally meets the eye. If you provide a solution purely based on their original request without going deeper, you will likely have a dissatisfied customer and frustrated end users by the end of the project. You might think that if the project goes up in flames, it's the custome's fault because it was his or her wish list, but you'll be the one who is blamed.


Brad Egeland is an IT/Project Management consultant and author with over 24 years of software development and management experience leading initiatives in Manufacturing, Government Contracting, Gaming and Hospitality, Retail Operations, Aviation and Airline, Pharmaceutical, Start-ups, Healthcare, Higher Education, Non-profit, High-Tech, Engineering and general IT.
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Sunday, October 24, 2010

A remembrance of Benoit Mandelbrot, the father of fractal geometry

*If you received this via email, click on the link at "Posted by ECGMA to ECBeez Blog" to view the blogpost"*

A zoom into the Mandelbrot Set, from 1:1 scale to a 6th-level mini-set. Set to Jonathan Coulton's "Mandelbrot Set" (used under the Creative Commons license; share and enjoy!)
Explanation of the Mandelbrot Set available at http://www.intellectualism.org ; click on Mathematics, then on "The Mandelbrot Set."

Mandelbrot Set Zoom


A remembrance of Benoit Mandelbrot, the father of fractal geometry

  • Date: October 22nd, 2010
  • Author: Edmond Woychowsky

Last week the world lost one of its great minds when mathematician Benoit Mandelbrot passed away. He was a member of Yale University’s prestigious Department of Mathematics and an IBM Fellow.

Mandelbrot worked on the kinds of mathematical problems that are beyond the comprehension of most people, but that doesn’t mean his work didn’t impact people in a positive way. His work has had a profound impact on other fields, including art, fluid dynamics, medicine, kinematics, seismology, and music.

Fractals were Mandelbrot life’s work. His book The Fractal Geometry of Nature describes the world around us — land, water and sky — in terms of fractals. While this talk of fractals might seem abstract, imagine computer games and CGI movies without fractal landscapes.

It seems to me that the majority of people were unaware that a giant walked among us, except perhaps for Jonathan Coulton who wrote a song about the Mandelbrot set. Fortunately, the father of fractal geometry left the beauty of his fractals to remind us that he was here.

Saturday, October 16, 2010

The Rule of 72

The Rule of 72 is a great mental math shortcut to estimate the effect of any growth rate, from quick financial calculations to population estimates. Here's the formula:

Years to double = 72 / Interest Rate

This formula is useful for financial estimates and understanding the nature of compound interest. Examples:

  • At 6% interest, your money takes 72/6 or 12 years to double.
  • To double your money in 10 years, get an interest rate of 72/10 or 7.2%.
  • If your country's GDP grows at 3% a year, the economy doubles in 72/3 or 24 years.
  • If your growth slips to 2%, it will double in 36 years. If growth increases to 4%, the economy doubles in 18 years. Given the speed at which technology develops, shaving years off your growth time could be very important.

You can also use the rule of 72 for expenses like inflation or interest:

  • If inflation rates go from 2% to 3%, your money will lose half its value in 36 or 24 years.
  • If college tuition increases at 5% per year (which is faster than inflation), tuition costs will double in 72/5 or about 14.4 years. If you pay 15% interest on your credit cards, the amount you owe will double in only 72/15 or 4.8 years!

The rule of 72 shows why a "small" 1% difference in inflation or GDP expansion has a huge effect in forecasting models.

By the way, the Rule of 72 applies to anything that grows, including population. Can you see why a population growth rate of 3% vs 2% could be a huge problem for planning? Instead of needing to double your capacity in 36 years, you only have 24. Twelve years were shaved off your schedule with one percentage point.

Deriving the formula

Half the fun in using this magic formula is seeing how it's made. Our goal is to figure out how long it takes for some money (or something else) to double at a certain interest rate.

Let's start with $1 since it's easy to work with (the exact value doesn't matter). So, suppose we have $1 and a yearly interest rate R. After one year we have:

1 * (1+R)

For example, at 10% interest, we'd have $1.10 at the end of the year. After 2 years, we'd have

1 * (1+R) * (1+R) = 1 * (1+R)^2

And at 10% interest, we have $1.21 at the end of year 2. Notice how the dime we earned the first year starts earning money on its own (a penny). Next year we create another dime that starts making pennies for us, along with the small amount the first penny contributes. As Ben Franklin said: "The money that money earns, earns money", or "The dime the dollar earned, earns a penny." Cool, huh?

This deceptively small, cumulative growth makes compound interest extremely powerful – Einstein called it one of the most powerful forces in the universe.

Extending this year after year, after N years we have

1 * (1+R)^N

Now, we need to find how long it takes to double — that is, get to 2 dollars. The equation becomes:

1 * (1+R)^N = 2

Basically: How many years at R% interest does it take to get to 2? Not too hard, right? Let's get to work on this sucka and find N:

1: 1 * (1+R)^N = 2 2: (1+R)^N = 2 3: ln( (1+R)^N ) = ln(2) [natural log of both sides] 4: N * ln(1+R) = .693 5: N * R = .693 [For small R, ln(1+R) ~ R] 6: N = .693 / R 

There's a little trickery on line 5. We use an approximation to say that ln(1+R) = R. It's pretty close – even at R = .25 the approximation is 10% accurate (check accuracy here). As you use bigger rates, the accuracy will get worse.

Now let's clean up the formula a bit. We want to use R as an integer (3) rather than a decimal (.03), so we multiply the right hand side by 100:

N = 69.3 / R

There's one last step: 69.3 is nice and all, but not easily divisible. 72 is closeby, and has many more factors (2, 3, 4, 6, 12…). So the rule of 72 it is. Sorry 69.3, we hardly knew ye.

Extra credit

Derive a similar rule for tripling your money – just start with

1 * (1+R)^N = 3

Give it a go – if you get stuck, see the rule of 72 for any factor. Happy math.


Identifying "The Long Tail" - Chris Anderson

Friday, October 15, 2010

Long Tail vs 80/20 Rule

Search: 

Long Tail vs 80-20

Long Tail vs. 80/20 Rule
Two popular marketing principles are at odds -- which principle applies to your product or service?

Marketing is the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods, or services in order to create exchanges that result in attention for specific products or services. There are two common principles or rules in marketing. The first is the "80/20 Rule", the other is the "Long Tail Theory", and both appear to be at odds. As a marketer, it is important to focus energy in order to maximize marketing efforts. Determining which principle works best for your business can be a challenge. Marketers work hard to develop strategies and tactics to identify, create, and maintain satisfying relationships with customers that will result in the best value.

Understanding the Principles...

80/20 Rule
The 80/20 Rule means that 80% of your business or sales will be generated from 20% of your customers. Or in other words. 20% of your efforts or customers are responsible for 80% of your businesses' revenue. This principle was recorded as "vital few and trivial many", meaning that 20 percent is vital (or critical) while 80% is trivial. The principle, of course, can be applied to a number of different things, but it is most often applied to businesses.

Long Tail Theory
The Long Tail Theory is a concept that somewhat counters the golden 80/20 Rule. The Long Tail Theory is derived from Pareto's thinking that low demand can effectively and collectively make up a market share that exceeds the few of those that are in high demand. What this means is that in aggregate, all the small customers exceed in volume the popular volume. In the Long Tail phenomenon, the trivial in mass out-perform the vital, making the vital insignificant and the insignificant vital. In other words, a large number small customers can potentially out-perform a small number of large customers.

Which is true for your business?
Determining which principle is in play in a specific business is not difficult -- simply look at the sales numbers and determine where the revenue is coming from: the few, or the many. That said, just because one model is in play, does not mean that it is the best model for your business. It may just mean that you have concentrated your marketing efforts in one area, rather than the other.

The old adage about having all the eggs in one basket indicates that perhaps the Long Tail Theory will sustain a businesses stability better than the 80/20 Rule. For example, if you rely on only a handful of customers for the bulk of your business, and something happens to any one of those customers, your business can be significantly impacted. On the other hand, if you rely on a great many customers for the bulk of your business, the loss of any one single customer will likely not impact your business in any significant way.

It is also important to keep in mind that the 80/20 Rule is a Golden Business Rule, while the Long Tail Theory is a theory that has been proven in only a handful of businesses (i.e. Amazon, eBay), and as a principle it may not be suited to all types of businesses.

By critically evaluating sales figures and understanding these two popular marketing principles, small businesses can experiment and focus their efforts in a manner that makes the most sense.


Long tail fails to stand up to online reality test

2 January 2009


The long tail theory of digital distribution implies that given almost unlimited choice, the total demand for less popular items will exceed that of the most popular items. Some studies have suggested that while the traditional demand curve may be growing a longer tail, it is getting flatter rather than fatter. The long and the short of it is that people still seem to gravitate towards towards the best-selling hits. This sting in the long tail could have important implications for online video distribution.


Chris Anderson popularised the concept of 'The long tail' in an article in Wired in 2004, and ironically it became the title of his best-selling business book. The incidence of Pareto or power law distributions was already well known, but the attraction of the long tail rapidly became a marketing mantra. The idea was simple. Given virtually unlimited shelf space, an online retailer can offer access to a vast catalogue. As a result, the total volume of sales of obscure niche items may exceed that of the most popular 20%.

Some recent studies have suggested that actual consumer behaviour may still result in a strong tendency towards popular hits. Some examples are summarised in an article in New Scientist.


A recent study from the MCPS-PRS Alliance, which is responsible for collecting music royalties in the United Kingdom, found that of the 13 million tracks available on a popular online music store, just 0.4 per cent, or 52,000 tracks accounted for 80 per cent of downloads.

"The inequality in revenue between hits and niches was jaw-droppingly stark," observed Will Page, the chief economist of the MCPS-PRS Alliance and co-author of the study, which was presented at a recent Telco 2.0 conference in London.


Only 20% of tracks in the study sold once or more, meaning that 80% of them did not sell at all. Moreover, around 80% of the revenue came from around 3% of those tracks that sold. Only 40 tracks in this example sold more than 100,000 copies, accounting for around 8% of revenues.


Chris Anderson has responded by saying that much more evidence would be needed to undermine the long tail theory. Without identifying the source of the data set used by the copyright collection society it is difficult to draw broader conclusions.

Other researchers suggest that in a fashion-led market, where consumer preferences are fickle and fast-changing, the most profit can actually be delivered by a very small number of items, equivalent to the 10 or 20 titles often stocked in an airport bookstore.

It may be a good marketing strategy to offer a huge range of choice, but the greatest attraction for shoppers, it is suggested, is probably the aggressive discounts offered on best-selling products.


The recommendation engines based on collaborative filtering, suggesting products that people like you like, may paradoxically promote the sale of more popular items, tending to direct sales towards more mainstream products, contributing to a homogenisation of choices.


Social networking also tends to promote the popular rather than the obscure. In a highly connected community, a small preference for a particular item can rapidly amplify and spread its appeal. Increased social connection may result in bigger blockbusters, but makes predicting them all the more difficult.


In fact, the proliferation of choice may make people more reliant on the recommendations of others to determine their own preferences.


In practice, people are not entirely rational, making independent decisions based on optimising from all the available information. Mass media reflect a social context which is part of a culture of shared ideas which gives us a sense of identity and belonging.


To which one might add that blockbusters do not simply emerge organically out of the combined choices of a population of consumers.


These choices are manipulated by many marketing influences that aim to produce popular, profitable products.


It is therefore important to take into account the sociology of media, based on an anthropological study of actual behaviour, rather than rely simply on economic ideals of perfect information and friction free distribution.


www.mcps-prs-alliance.co.uk
www.longtail.com


Internet business models debunk The Long Tail theory

Internet business models debunk The Long Tail theory

Wednesday, 05 August 2009 22:16 Noric Dilanchian

pc_kill

An internet business model riddle exists for content creators, owners and publishers. It's a riddle about how to make money when so much information is free on the internet.

Prominent in all this is Google which in 10 years has shaped a perfect market for itself. Google brings net users to publishers (Google search) and sells them to advertisers (Google Adwords). For many publishers there is a business model riddle left for them, and little money. Some would like to shoot the messenger, Google.

The thirst for answers to the publisher's riddle of how to make money on the internet is so great that catch phrases or unproven theories have been taken up as assumed truths. Repetition has made them appear to be credible. It's time to debunk a couple of those catch phrases and theories.

In the 1990s there were prophets for the catch phrase "Information wants to be free". Loud advocates included John Perry Barlow. I never found him convincing in any of his 1990s articles in Wired magazine. The free model worked for him as a lyricist for Grateful Dead, but that's not enough evidence.

free_chris_anderson_bookIn our current decade there has been Chris Anderson, Editor-in-Chief of Wired, including in his book The Long Tail and his July 2009 book., Free: The Future of a Radical Price. The Free book is now being talked up by some and questioned by others.

I wrote on The Long Tail theory in my first Lightbulb blog post - The long tail versus the hit industry typology. I was not convinced then about the theory, I'm absolutely unconvinced today.

I've never been a fan of the theories of Barlow or Anderson. But rarely has there been enough evidence to test my hunch.

I found credible evidence a year ago, in September 2008, but decided to keep it to myself, and my powder dry.

Now is the time to talk. Because today I found another like-minded critic, someone too with credible background experience, and more evidence. We'll get back to him at the end of this article.

First let's examine the dry powder debunking The Long Tail theory, from none other than Google's CEO.

I made note a year ago of a video interview by Dr Eric Schmidt, CEO of Google, with McKinsey Quarterly. Set out below are long extracts from Dr Schmidt's interview where he critiques The Long Tail theory. Read them carefully.

The Quarterly: So how do companies make money in these markets?

Eric Schmidt: Free is a better price than cheap. And this simple principle has been lost on many a business person. There are business models that involve free with adjacent revenue sources. And, in fact, free is a viable model with branding [advantages], [charges for] service, and other things. But it's a different business model from what most of us are used to.

A rule of economics is that for manufacturing and mature businesses, eventually the price of the good goes to the marginal cost of its production and distribution. Well, in the digital world, for digital goods, the marginal cost of distribution and manufacture is effectively zero or near zero. So, certainly, for that category of goods, it's reasonable to expect that the free model with ancillary branding and revenue opportunities is probably a very good thing.

In the same interview Dr Schmidt says:

pc_aliveI would like to tell you that the Internet has created such a level playing field that the long tail is absolutely the place to be—that there's so much differentiation, there's so much diversity, so many new voices. Unfortunately, that's not the case. What really happens is something called a power law, with the property that a small number of things are very highly concentrated and most other things have relatively little volume. Virtually all of the new network markets follow this law.

So, while the tail is very interesting, the vast majority of revenue remains in the head. And this is a lesson that businesses have to learn. While you can have a long tail strategy, you better have a head, because that's where all the revenue is.

And, in fact, it's probable that the Internet will lead to larger blockbusters and more concentration of brands. Which, again, doesn't make sense to most people, because it's a larger distribution medium. But when you get everybody together they still like to have one superstar. It's no longer a US superstar, it's a global superstar. So that means global brands, global businesses, global sports figures, global celebrities, global scandals, global politicians.

So, we love the long tail, but we make most of our revenue in the head, because of the math of the power law. And you need both, by the way. You need the head and the tail to make the model work.

Tom Foremski, blogger at Silicon Valley Watcher, is the like-minded critic I read today of The Long Tail theory. Foremski is a full time journalist and many of his 2009 articles have been insightful reviews on the economics of newspapers today especially in the U.S.

On reading  his blog post today on Anderson I was moved to add a comment to all the above.

Tonight I noted that Tom had replied to my comment with more powder testing Anderson's Long Tail theory:

Noricd: The long tail theory assumes that there is no marketing to be done to reach the small numbers of people that might be interested in buying long tail content. Those small communities are hard to reach, the marketing is expensive. No Silicon Valley startup wants to be exploiting the long tail when the bulk of the profits are in the short tail. There's no money in the long tail and it's a big (and growing) expense. Think about all those photos of my grandma that Facebook or Flickr hosts and that have a market consisting of maybe ten people. Even though storage is cheap managing that mountain of long tail content is not. I guess if we update this all with Mr Anderson's "free" economy, now that (nearly) all digital content is free there is even less money to be made in long tail content. Nothing much has changed from the old world to the new. Still very little money in the long tail...



Report challenges Long Tail theory on P2P networks

By Eliot Van Buskirk |15 May 2009 |
Report challenges Long Tail theory on P2P networks

Wired US editor-in-chief Chris Anderson's Long Tail theory (article, book, blog) predicts that digital distribution will lead to a jump in demand for niche content.

Not so for music trading hands on peer-to-peer networks, a new study reports, concluding that hits are in highest demand just as they are in the retail market.

"Consumers are still driven to seek the same music in legal and illegal markets," reads the report (.PDF), published yesterday by BigChampagne Media Measurement and the music rights organisation, PRS for Music. "The most swapped files were also the most downloaded on legal music sites, indicating that what's popular is popular."

In an email interview, Anderson defended his theory, saying that it describes some industries and technologies better than others. It depends on variety in the marketplace at issue and how easy it is for users to find and discover new items.

"I suspect that says as much about P2P technology as it does about music," Anderson said. "If just a few people are sharing a file, it makes it harder to find and get."

"This research, which looks quite good, suggests that the nature of P2P music is that it follows the log-normal model," he continued, referring to a more traditional distribution where most of the activity is about the hits, rather than being distributed deeply among lesser-known items. "File-trading clients like BitTorrent are optimised for 'hits,' in that you're more likely to find someone (or many people) sharing popular files locally, and thus have a better chance at a successful download."

That's very different from a centralised service with a very large catalogue of music such as Rhapsody, according to Anderson. That's what he used for his music research, where he found users were much more interested in niche and less popular music than previous economic models would have predicted — ergo, the Long Tail.

Indeed, anyone who uses P2P realises that long-tail content is harder to find there, and when you do find it, it takes longer to download. Hit songs near the top of the charts, however, often download in mere seconds, which could go a long way towards explaining why the Long Tail theory doesn't apply to P2P the way it does to services where each song is as easy to download as the next.

This isn't the the first time the Long Tail theory has been called into question. In November, report co-author and PRS for Music chief economist Will Page found that the mobile music provider MBlox also followed a "head-heavy" pattern, prompting digital music provider eMusic to release data in support of the theory.

Still, looking at the report's signature graph, there's no denying that their data shows "a skinnier pirates' tail" than one might expect given Long Tail theory:

p2p_lt_chart1

The long tail could be much longer than it looks here, however, because the graph uses percentages, and tracks only music that can be legally purchased in online music stores. Some estimates peg the number of tracks available on peer-to-peer networks at 30 million or higher, compared to the 8 million or so in iTunes. The study found that "every track gets a swap," meaning that these extra 22 million or so tracks could contribute to a longer, and therefore more significant tail, than the study indicates.



Has the Long-Tail Theory Been Disproved?

Brian Wool  |  July 17, 2008

The "Long-Tail Theory" was first coined by Chris Anderson in a 2004 "Wired" magazine article. In a nutshell, it describes how the Internet makes it possible for e-commerce sites such as Amazon or Netflix to achieve significant profits by selling small volumes of hard-to-find items to consumers, instead of only selling large volumes of a few highly sought after items.

In a recent Harvard Business Review article, Harvard associate professor Anita Elberse contends that in the broader market of consumers buying products online, the long tail doesn't exist. Just because the Internet makes it possible to offer a near-infinite inventory of goods for sale doesn't mean consumers will start wanting more obscure items in any great numbers, she said. Even Anderson acknowledges some data in the professor's study may be valid, but he wants it to be known that the way in which he and Elberse define the "head" and "tail" are completely different.

What does this have to do with local search marketing? In March 2007, I wrote a column applying the long-tail theory to local search. I discussed the opportunity that niche, regional, and hyper-local directory sites had to reach consumers online.

Because of the further proliferation and fragmentation of newly launched local sites just 18 months after I first wrote on this topic, the long-tail theory is still, if not more so, applicable to local search today. Why? It seems as though consumers have more choices in local directory sites today when they conduct a local search at any of the major search engines.

According to data from a comScore report, only 36 percent of users' time online is spent on the top 20 sites -- a 4 percent decrease in just one year. This trend illustrates the tremendous opportunity for reach available to existing local search engines as well as all of the new sites that are launching at a breakneck speed.

This gets at the heart of the long-tail theory relative to local search; the "head" being the major search engines and Internet yellow pages and the "tail" representing new and emerging sites. Eighteen months ago, data showed that about 82 percent of local search was going to the "head." Today that number is closer to 90 percent.

If you look closely the "head" is creating the "tail" in the local search ecosystem. For example, the local results at Google for a service-based business in Chicago point to 10 unique sites plus 10 local listings at the top -- the so-called Google 10 Pack. But even within the Google 10 Pack, the "tail" is greatly magnified.

A search for plumbers in Chicago at Google resulted in the normal results; the Google 10 Pack followed by 10 unique local directory sites. However, once I clicked on the "more" link for the top business listing in the 10 Pack, I found 40 additional local sites (e.g. Fave, Open List, YellowBot). This is the long-tail theory hard at work in local search.

The proliferation of local search sites creates a unique opportunity for savvy businesses big and small to maximize their online reach. This opportunity comes at a cost, however. It's not easy understanding and ensuring that your network of locations is being distributed to all of the sites hosting a local business directory that the major search engines index.

Long past are the days of investing all of your online marketing resources at the five to 10 sites that garner the majority of the overall local search market share. The long tail simply won't allow that strategy to perform the way it did two years ago.



Long Tail theory contradicted as study reveals 10m digital music tracks unsold

From
December 22, 2008

Long Tail theory contradicted as study reveals 10m digital music tracks unsold

Digital sales figures dent niche market theory



The internet was supposed to bring vast choice for customers, access to obscure and forgotten products - and a fortune for sellers who focused on niche markets.


But a study of digital music sales has posed the first big challenge to this "long tail" theory: more than 10 million of the 13 million tracks available on the internet failed to find a single buyer last year.


The idea that niche markets were the key to the future for internet sellers was described as one of the most important economic models of the 21st century when it was spelt out by Chris Anderson in his book The Long Tail in 2006. He used data from an American online music retailer to predict that the internet economy would shift from a relatively small number of "hits" - mainstream products - at the head of the demand curve toward a "huge number of niches in the tail".


However, a new study by Will Page, chief economist of the MCPS-PRS Alliance, the not-for-profit royalty collection society, suggests that the niche market is not an untapped goldmine and that online sales success still relies on big hits. They found that, for the online singles market, 80 per cent of all revenue came from around 52,000 tracks. For albums, the figures were even more stark. Of the 1.23 million available, only 173,000 were ever bought, meaning 85 per cent did not sell a single copy all year.


Mr Anderson told The Times yesterday that he accepted that Mr Page and his co-researcher, Andrew Bud, the head of mobile software company mBlox, had found a dataset in which the "long tail" principle did not apply. But he said further conclusions could not be drawn until the data and its sources were published.


Mr Page and Mr Bud believe, however, that their findings seriously undermine Mr Anderson's thesis, which came with subtitles such as: How endless choice is creating unlimited demand and Why the Future of Business is Selling Less of More.

"I think people believed in a fat, fertile long tail because they wanted it to be true," said Mr Bud. "The statistical theories used to justify that theory were intelligent and plausible. But they turned out to be wrong. The data tells a quite different story. For the first time, we know what the true demand for digital music looks like."


Mr Page, who carried out the economic modelling for Radiohead's In Rainbows album, which was released free on the internet, said: "The relative size of the dormant 'zero sellers' tail was truly jaw-dropping. Rather than continue to believe the selective claims of 'here's another great example of the long tail at work', we wanted to find out how longtail markets should be analysed, plotted and interpreted."


However, Mr Anderson named by Time magazine as one of the world's 100 most influential people - told The Times: "There is a reason why the 'long tail' has become a fixture in the technology world over the past five years - it fits countless phenomena we see every day.


"I respect what Will's done and have no doubt that he has indeed found a dataset where it doesn't work, but I'm not sure you can conclude much, if anything, beyond that. If he's trying to undermine the entire Long Tail Theory, he'll have to provide a lot more evidence. I welcome the debate, but until Will's prepared to publish data and sources we don't have much to talk about."

Mr Page and Mr Bud found that, rather than following Mr Anderson's predictions, online music sales followed instead a sales distribution laid down by Robert Goodell Brown, an American economist, in 1956.


Mr Brown, who was an academic at Yale, outlined the theory in Statistical Forecasting For Inventory Control, a landmark tract on inventory control that focused on the sales of industrial items such as rivets and widgets.

Mr Page said: "There is an eerie similarity between a digital and high-street retailer in terms of what constitutes an efficient inventory and the shape of their respective demand curves. I think there's something more going on there: a case of new schools meets old rules."

Mr Page and Mr Bud are working on a book of their findings and hope to stage a debate with Mr Anderson in Brighton next May.


The long and short of it

—Chris Anderson's The Long Tail challenged the "80/20 rule" widely accepted in retailing. This suggests that selling the most popular 20 per cent of products is the way to make a profit as they will account for 80 per cent of sales

—Anderson's analysis of online music sales suggested that, thanks to the cheapness, simplicity and global accessibility of searching for products online, retailers could make money from more obscure products because they would always find an audience

—An employee of Amazon, a company seen as an example of the Long Tail Theory in practice, once said: "We sold more books today that didn't sell at all yesterday than we sold today of all the books that did sell yesterday"

—Eric Schmidt, the CEO of Google, described The Long Tail as "brilliant and timely". Malcolm Gladwell, the writer and sociologist, labelled it a "Truly Big Idea"

—Critics suggest the book is more a projection of an idealised market place than a model of a real one



Long Tails and Big Heads

Long Tails and Big Heads

Why Chris Anderson's theory of the digital world might be all wrong.

The Long TailNearly four years ago, first in a widely cited article and later in a best-selling book, Chris Anderson posited that the Internet, with its vast inventories of books, albums, and movies, would liberate the world from blockbuster schlock. Anderson, the editor of Wired, labeled his concept "the Long Tail," after the shape our digital desires leave on a graph: When we buy stuff online, we can reach beyond big hits and into the "tail" of the demand curve, where we're free to indulge our most obscure passions. Anderson argued that serving our niche interests could also make for booming Web businesses. This was the thrill of the Long Tail—it seemed to offer a way for art and commerce to thrive side-by-side.


Now, just in time for The Long Tail's paperback release, the book has fallen under critical scrutiny. Anita Elberse, a marketing professor at the Harvard Business School, recently examined several years' worth of American movie- and music-sales data. The entertainment business has indeed seen its inventory shifting toward a Long Tail curve, Elberse writes in the Harvard Business Review. The shift is slight, however, and Anderson's Long Tail is also "extremely flat."

It's true that we're now buying more obscure movies and music than ever before. But we're merely nibbling on these niches, Elberse reports, while we continue to gorge on a small selection of hits. In 2007, 24 percent of the nearly 4 million digital songs available for sale through stores like iTunes sold only one copy each, and 91 percent of available tracks sold fewer than 100 copies each. The story is the same for the movie business, where, between 2000 and 2005, the number of titles that were purchased only a few times "almost quadrupled." The Internet offers us a buffet of everything—and yet we're mainly settling for the likes of The Love Guru and You Don't Mess With the Zohan.

_________________________________________________________________________________________________________________

Elberse's findings are more than a little surprising. The Long Tail wasn't just a pet theory; as Anderson sketched it, the phenomenon arose out of actual innovations in commerce. Take Anderson's signal example of Long Tail success, British mountain climber Joe Simpson's Andean-survival story Touching the Void. When it was released in 1988, the book saw only modest success and then essentially disappeared from stores. But a decade later, after Jon Krakauer published Into Thin Air, a mountaineering-survival hit, Simpson's book enjoyed a sudden boom. The cause was online word of mouth—recommendations for Touching the Void on Amazon's Into Thin Air page pushed people to purchase a book they'd never heard of. After it was reissued as a paperback and made into a documentary, Touching the Void's sales eclipsed those of Into Thin Air. Before the Internet, such out-of-the-blue success for a deep-in-the-tail book could never have occurred.

But according to Elberse, that sort of anecdote is the exception. The reason? We're not very adventurous. Elberse examined the rental habits of customers at Quickflix, a Netflix-like service in Australia. She found that no group of customers exhibited "a particular taste for the obscure." Sure, a small number of customers regularly rented films from deep in the catalog—but they tended to be people who watched a lot of movies generally and so had much more "capacity" for venturing into the Long Tail. And still they chose a lot of hits: The most widely traveling Quickflix customers picked only 8 percent of their rentals from the least popular of available titles and 34 percent from among blockbusters.


What Is the Long Tail and How Does It Apply to Google?

By , About.com Guide


Graphic © 2008 Marziah Karch

I often hear the term "the Long Tail" or sometimes the "fat tail" or the "thick tail" in reference to search engine optimization and Google. What does it mean and where did it come from?
Answer: The Long Tail is a phrase that comes from a Wired article by Chris Anderson. He has since expanded the concept into a blog and a book.

What Does It Mean?

Basically the Long Tail is a way to describe niche marketing and the way it works on the Internet. Traditionally records, books, movies, and other items were geared towards creating "hits." Stores could only afford to carry the most popular items because they needed enough people in an area to buy their goods in order to recoup their overhead expenses.

The Internet changes that. It allows people to find less popular items and subjects. It turns out that there's profit in those "misses," too. Amazon can sell obscure books, Netflix can rent obscure movies, and iTunes can sell obscure songs. That's all possible because the Internet has taken geographic location out of the equation.

How Does This Apply to Google?

Google makes most of their money on Internet advertising. Anderson referred to Google as "Long Tail advertisers." They've learned that niche players need advertising just as much, if not more than mainstream companies.

CEO Eric Schmidt said, "The surprising thing about The Long Tail is just how long the tail is, and how many businesses haven't been served by traditional advertising sales," when describing Google strategy in 2005.

AdSense and AdWords are performance based, so niche advertisers and niche content publishers can all take advantage of them. It doesn't cost Google any extra overhead to allow Long Tail customers to use these products, and Google makes billions in revenue from the aggregate.

How Does This Apply to SEO

If your business depends on people finding your websites in Google, the Long Tail is very important. Rather than focusing on making one Web page the most popular Web page, concentrate on making lots of pages that serve niche markets.

Rather than focus on optimizing your pages for one or two really popular words, try for Long Tail results. There is a lot less competition, and there's still room for popularity and profit.

Heads and Thick Tails - Money in the Aggregate

People often refer to the most popular items, pages, or widgets as the "head," as opposed to the Long Tail. They also sometimes refer to the "thick tail," meaning the more popular items on the Long Tail.

After a certain point, the Long Tail ends up dipping off into obscurity. If only one or two people ever visit your website, you're probably never going to make any money from advertising on it. Likewise, if you're a blogger who writes on a very niche topic, it will be difficult to find enough of an audience to pay for your efforts.

Google makes money from the most popular ads on the head down to the thinnest section of the Long Tail. They still make money from the blogger that hasn't made the minimum earning requirement for an AdSense payment.

Content publishers have a different challenge with the Long Tail. If you're making money with content that fits in the Long Tail, you want a thick enough portion to make it worthwhile. Keep in mind that you still need to make up for your losses in quantity by offering more variety. Instead of concentrating on one blog, maintain three or four on different topics.



Rethinking the Long Tail Theory: How to Define 'Hits' and 'Niches'

Published: September 16, 2009 in Knowledge@Wharton

Using data on movie-rating patterns, new Wharton research challenges current thinking on the Long Tail effect -- a widely publicized theory that suggests the Internet drives demand away from hit products with mass appeal, and directs that demand to more obscure niche offerings.


In a working paper titled, "Is Tom Cruise Threatened? Using Netflix Prize Data to Examine the Long Tail of Electronic Commerce,"Wharton Operations and Information Management professor Serguei Netessine and doctoral student Tom F. Tan pull information from the movie rental company Netflix to explore consumer demand for smash hits and lesser-known films. Netflix made its data available as part of a $1 million prize competition to encourage the development of new ways that will improve its ability to introduce customers to lesser-known titles they might find appealing.


The Long Tail theory suggests that, as the Internet makes distribution easier -- and uses state-of-the-art recommendation systems that allows consumers to become aware of more obscure products -- demand will shift from the most popular products at the "head" of a demand curve -- as charted on an xy axis -- to the aggregate power of a long "tail" made up of demand for many different niche products.


The Wharton researchers find that the Long Tail effect holds true in some cases, but when factoring in expanding product variety and consumer demand, mass appeal products retain their importance. The researchers argue that new movies appear so fast that consumers do not have time to discover them, and that niche movies are not any more well-liked than hits.


According to Netessine, the Long Tail effect may be present in some cases, but few companies operate in a pure digital distribution system. Instead, they must weigh supply chain costs of physical products against the potential gain of capturing single customers of obscure offerings in a rapidly expanding marketplace. Companies, they add, must also consider the time it takes for consumers to locate off-beat items they may want.


"There are entire companies based on the premise of the Long Tail effect that argue they will make money focusing on niche markets," says Netessine. "Our findings show it's very rare in business that everything is so black and white. In most situations, the answer is, 'It depends.' The presence of the Long Tail effect might be less universal than one may be led to believe."


The Long Tail theory was developed in 2004 by Chris Anderson, editor-in-chief of Wired magazine. Anderson is also author of The Long Tail: Why the Future of Business Is Selling Less of More. The key difference between the opinion of the book and the study by Wharton researchers is how they define "hits" and "niches." In the book, Anderson focuses on the definition of hits in absolute terms such as the top 10 or top 1,000 products, while Netessine and Tan argue that, to take growing product variety into account, one has to define popularity in relative terms, such as the top 1% or top 10% of products, to properly assess the presence or absence of the Long Tail.


In an e-mail, Anderson says the Wharton paper and other academic evaluations that are critical of the Long Tail theory are not relevant because they take a percentage approach to evaluating the power of the head and tail of demand.

"Although academics are free to do all the relative analysis they want, it is incorrect to apply it to my theory," he writes. Anderson argues that defining the head and tail of demand in percentage terms is meaningless in a market with unlimited inventory, such as a retailer with digital distribution. For example, take a company with 1,000 different items in which the top 100 -- or 10% -- account for 50% of sales. If 99,000 more items are added to the catalog and sales of the top 100 fall to 25% of the total, it may take another 900 items to make up the next 25%. In this case, Anderson would argue that sizable demand has shifted down the tail toward more people selecting fewer products.


In relative terms, however, 1% of the products now constitute 50% of the revenues, which would make it appear that there was a greater importance of the hit products. But since real people experience the world in absolute numbers, not percentages, this is a statistical illusion, he states. The truth is that people are choosing a wider array of titles. "Nobody in the business world is confused about this, thankfully," Anderson adds.


Netessine, who shared drafts of the paper with Anderson, says the Long Tail theory is "fascinating" and he notes that he recommends Anderson's book to incoming MBA students.


Nonetheless, he and Tan contend that Anderson's focus on absolute demand can be misleading. "One has to be careful about defining hits and niches in the Internet era," the paper states. "In a brick-and-mortar world, where product variety is relatively stable and all products are consumed at some rate, hits and niches are typically defined in absolute terms (e.g., the top 10, the bottom 100 movies). However, product variety has been skyrocketing in the Internet age, and therefore more and more products can be left unnoticed by consumers, or are being discovered very slowly, even though the customer base is also expanding."


The 80-20 Rule

(Read also: http://ecbeez.blogspot.com/2010/01/simple-secret-to-stop-procrastination.html)

(Read also: http://ecbeez.blogspot.com/2010/10/what-is-8020-rule-and-why-it-will.html)

(Read also: http://ecbeez.blogspot.com/2010/10/paretos-principle-80-20-rule.html)

Indeed, at Netflix the number of rated movie titles increased from 4,470 in 2000 to 17,768 in 2005. If this product variety is taken into account so that product popularity is calculated relative to the total product variety, Wharton researchers do not find any evidence of the Long Tail effect. The authors also performed an analysis taking an absolute approach to the Netflix data, like Anderson, and found that the Long Tail effect is only partially present: Demand for niches decreases over time -- rather than increases -- although demand for hit products also declines.


The Wharton researchers also disagree with Anderson's theory and its implicit challenge to the Pareto principle, or so-called 80-20 rule, which in this case would state that 20% of the movie titles generate 80% of sales. Anderson argues that as demand shifts down the tail, the effect would diminish. Using Netflix data, Netessine and Tan show the opposite -- an even stronger effect, with demand for the top 20% of movies increasing from 86% in 2000 to 90% in 2005.

Anderson did his own analysis using the Wharton data and found lower demand for the top 500 products and more interest in the middle part of the curve. He also points out that a Long Tail adding up to 15% of total demand came from titles beyond the top 3,000 -- the amount typically stocked in a video store.


While the Long Tail theory focuses on the revenue potential of selling many individual products, Netessine says it is important to acknowledge that cultivating this revenue comes at a cost -- including expenses associated with operating its distribution centers and stocking thousands of DVDs.


When applying the Long Tail theory to companies, Netessine says, a relative analysis is more meaningful because it takes into account the costs involved in maintaining a supply chain to feed demand for many obscure choices. He points to Amazon as another example of an Internet distribution company that still has substantial costs involving warehousing and shipping.


A business model based on the Long Tail effect might work for a company based on pure digital distribution, such as the music website Rhapsody, according to Netessine. "For Rhapsody the cost of stocking the extra songs is zero," he says. "As a result, it doesn't cost anything to offer unbelievable product variety, and the consumer can go into the Long Tail and consume songs that were previously unavailable."


For any company marketing a physical product, such as Netflix's DVDs or Amazon's books, managers must weigh the costs of stocking an item against the likelihood that it will generate revenue. "If you stock a lot of products that nobody consumes, then you have a problem," says Netessine. "You have to start worrying about products not having enough demand and consumers not discovering the products fast enough. That's exactly what we find in the Netflix data."


Netessine points out that Netflix reported 55,000 movie titles in its 2005 annual statement, but, based on the data, only 18,000 of them were rated by the customers. In all, the researchers based their observations on an examination of 480,000 users, 17,770 movies and television series, and more than 100 million ratings representing a 10% random sample of all Netflix ratings.

The Wharton paper also explores how consumers branch out from hits to discover more obscure products. Netessine says the research indicates that "primitive" recommendation systems are likely to blame for the delay in lesser known products becoming available and consumers finding their way toward them. "Many recommendation systems are not terribly smart," Netessine states, adding that recommendations about films are made to Netflix subscribers who view similar films. But in order for a film to be recommended, it must be viewed in the first place. "If you want to see the long tail effect -- consumers going into those obscure products -- you have to be sure consumers learn about them, and that's not easy. Current tools may not be good enough."

Indeed, Netflix made its data available as part of a $1 million competition to develop an algorithm that would lead to a 10% improvement in predicting user ratings. The company is now in the process of determining the winner.


The researchers also investigated the Long Tail theory premise that consumers will gravitate to more obscure products because they will find them more satisfying than mass-market hits. Contrary to Anderson's suggestion and independent of how popularity is measured, Wharton researchers find that consumers tend to be less satisfied with niche movies than with hit movies. Moreover, it is mostly heavy movie watchers who venture into niche movies. Since only a small fraction of consumers constitute heavy movie watchers, it is not surprising that there is weak evidence of the Long Tail effect, Netessine concludes.


The paper argues that the research findings have important implications because the Long Tail theory has gained momentum in the business world. "Whether or not the Long Tail exists is a fundamental question for decision makers in marketing, operations and finance who face the prospect of further penetration of the Internet channel, which offers expanding product variety and new recommendation systems to help manage it," the paper states.


According to Netessine, the research is likely to generate controversy because of its findings that contradict the popular Long Tail theory. Nonetheless, Anderson is the first individual acknowledged at the end of the paper for "his encouraging comments and constructive advice." Says Netessine: "We have agreed to disagree."


Understanding the Pareto Principle (The 80/20 Rule)

Understanding the Pareto Principle (The 80/20 Rule)


Originally, the Pareto Principle referred to the observation that 80% of Italy's wealth belonged to only 20% of the population.
More generally, the Pareto Principle is the observation (not law) that most things in life are not distributed evenly. It can mean all of the following things:
  • 20% of the input creates 80% of the result
  • 20% of the workers produce 80% of the result
  • 20% of the customers create 80% of the revenue
  • 20% of the bugs cause 80% of the crashes
  • 20% of the features cause 80% of the usage
  • And on and on…
But be careful when using this idea! First, there's a common misconception that the numbers 20 and 80 must add to 100 — they don't!
20% of the workers could create 10% of the result. Or 50%. Or 80%. Or 99%, or even 100%. Think about it — in a group of 100 workers, 20 could do all the work while the other 80 goof off. In that case, 20% of the workers did 100% of the work. Remember that the 80/20 rule is a rough guide about typical distributions.
Also recognize that the numbers don't have to be "20%" and "80%" exactly. The key point is that most things in life (effort, reward, output) are not distributed evenly – some contribute more than others.

Life Isn't Fair

What does it mean when we say "things aren't distributed evenly"? The key point is that each unit of work (or time) doesn't contribute the same amount.
In a perfect world, every employee would contribute the same amount, every bug would be equally important, every feature would be equally loved by users. Planning would be so easy.
But that isn't always the case:
pareto_graph.png
The 80/20 rule observes that most things have an unequal distribution. Out of 5 things, perhaps 1 will be "cool". That cool thing/idea/person will result in majority of the impact of the group (the green line). We'd like life to be like the red line, where every piece contributes equally, but that doesn't always happen.
Of course, this ratio can change. It could be 80/20, 90/10, or 90/20 (remember, the numbers don't have to add to 100!).
The key point is that most things are not 1/1, where each unit of "input" (effort, time, labor) contributes exactly the same amount of output.

So Why Is This Useful?

The Pareto Principle helps you realize that the majority of results come from a minority of inputs. Knowing this, if…
20% of workers contribute 80% of results: Focus on rewarding these employees.
20% of bugs contribute 80% of crashes: Focus on fixing these bugs first.
20% of customers contribute 80% of revenue: Focus on satisfying these customers.

The examples go on. The point is to realize that you can often focus your effort on the 20% that makes a difference, instead of the 80% that doesn't add much.
In economics terms, there is diminishing marginal benefit. This is related to the law of diminishing returns: each additional hour of effort, each extra worker is adding less "oomph" to the final result. By the end, you are spending lots of time on the minor details.

A Fun, Non-Math Example, Please

Everything is nice and rosy in the abstract. I want to give you a real example. Take a look at this awesome video of an artist drawing a car in Microsoft Paint. It's pretty phenomenal what can be accomplished with such a basic tool:




Now let's deconstruct this video. It's about 5 minutes long, so each minute is about 20% of the way to completion (of course the video is sped up, but we are only interested in relative times anyway). Take a look at how the car evolved over time:
car_1_06_100.jpg car_2_00_100.jpg car_3_05_100.jpg car_4_04_100.jpg car_5_05_100.jpg
1:06 (Level 1) – Wireframe
2:00 (Level 2)
– Basic coloring
3:05 (Level 3)
– Beginning details: rims, windshield
4:04 (Level 4)
– Advanced details: shading, reflections
5:05 (Level 5)
– Finishing touches: headlights, background
Now, let's say the artist was creating potential designs for a client. Given 5 minutes of time, he could present:
  • A single car at top quality (Level 5)
  • A reasonably detailed car (Level 3) and a colorized wireframe (Level 2)
  • 5 cars at a wireframe level (5 Level 1s)
"But #5 is way better than #1!!!" someone will inevitably shout.
The point isn't that #5 is better than #1 — it clearly is. The question is whether #5 is better than five #1s, or some other combination.
Let's say your customer doesn't know whether they want a car, a truck, or a boat, let alone the color. Spending the time to create a Level 5 drawing wouldn't make sense — show some concepts, get a general direction, and then work out the details.
The point is to put in the amount of effort needed to get the most bang for your buck — it's usually in the first 20% (or 10%, or 30% — the exact amount can vary). In the planning stage, it may be better to get 5 fast prototypes rather than 1 polished product.
In this example, after 1 minute (20% of the time) we have a great understanding of what the final outcome will be. Most of the "work" is done up front, in the sense of deciding the type of vehicle, body style, and perspective. The rest is "filling in details" like colors and shading.
This isn't to say the details are easy — they're not — but each detail does not add as much to the picture as the broad strokes in the beginning. The difference between #4 and #5 is not as great as #1 and #2, or better yet, a blank drawing and #1 (the time from 0:00 to 1:06). You really have to look to see the differences on the car between #4 and #5, while the contribution #1 makes is quite obvious.

Concluding Thoughts

This may not be the best strategy in every case. The point of the Pareto principle is to recognize that most things in life are not distributed evenly. Make decisions on allocating time, resources and effort based on this:
  • Instead of 1 hour on a rough draft for an article you may write, spend 10 minutes on 6 outlines for a paper / blog article and pick the best topic.
  • Instead of investing 3 hours on a website, spend 30 minutes and create 6 different template layouts.
  • Rather than spending 3 hours to read 3 articles in detail (which may not be relevant to you), spend 5 minutes glancing through 12 articles (1 hour) and then spend an hour each on the two best ones (2 hours).
These techniques may or may not make sense – the point is to realize you have the option to focus on the important 20%.
Lastly, don't think the Pareto Principle means only do 80% of the work needed. It may be true that 80% of a bridge is built in the first 20% of the time, but you still need the rest of the bridge in order for it to work. It may be true that 80% of the Mona Lisa was painted in the first 20% of the time, but it wouldn't be the masterpiece it is without all the details. The Pareto Principle is an observation, not a law of nature.
When you are seeking top quality, you need all 100%. When you are trying to optimize your bang for the buck, focusing on the critical 20% is a time-saver. See what activities generate the most results and give them your appropriate attention.

What Is The 80/20 Rule And Why It Will Change Your Life

by Yaro Starak

I mention the 80/20 rule frequently in my writings so I thought it was about time to write a proper introduction to the concept. I believe it's fundamental to every business person – to every human being – so if you have never heard of this rule, please read on and absorb everything I'm about to tell you, it could potentially change your life.

The 80/20 rule sounds like a statistic and in some ways it is. Personally I'm not a big fan of maths and beyond basic web statistics like pageviews, impressions, unique visitors – and when I stretch myself – conversion rates and split testing, I try and avoid all complex numbers. I work better with feelings, ideas and concepts.

The good thing about the 80/20 rule is that you don't have to understand statistics to be a believer. Yes it has foundations in economics and yes, it was "proven" using statistical analysis by a man named Pareto, but it is not meant to be understood only by economics professors.

Here's what the Wikipedia has to say about it:

The principle was suggested by management thinker Joseph M. Juran. It was named after the Italian economist Vilfredo Pareto, who observed that 80% of income in Italy was received by 20% of the Italian population. The assumption is that most of the results in any situation are determined by a small number of causes.

Living The 80/20 Way: Work Less, Worry Less, Succeed More, Enjoy More by Richard KochI can't remember exactly when I was first exposed to the 80/20 Rule but I know when it first really hit home. I was in my local bookshop and I picked up a copy of Living The 80/20 Way by Richard Koch. Koch took the 80/20 Rule and made it his own by writing a series of books on the topic. Living The 80/20 Way fit me well because it discussed living life productively seeking maximum satisfaction by focusing on your passions (Koch has written other books focusing on the 80/20 Rule for business and managers that I didn't enjoy quite as much). At the time I sometimes accused myself of being lazy for not "working hard" but I realized what I was doing was living an 80/20 lifestyle and in fact probably being a lot more productive than those working harder than myself.

What Exactly Is The 80/20 Rule?

By the numbers it means that 80 percent of your outcomes come from 20 percent of your inputs. As Pareto demonstrated with his research this "rule" holds true, in a very rough sense, to an 80/20 ratio, however in many cases the ratio can be a lot higher – 99/1 may be closer to reality.

It really doesn't matter what numbers you apply, the important thing to understand is that in your life there are certain activities you do (your 20 percent) that account for the majority (your 80 percent) of your happiness and outputs.

You may have expected me to say that 20 percent of your activities produce 80 percent of your financial rewards, and that is true, there are probably a handful of activities you do each week that produce your income. You can definitely apply the 80/20 Rule to most aspects of your business or working life, however I believe your overall happiness and satisfaction are much better variables to focus on. Money certainly plays an important role in your happiness and your money is influenced by 80/20 relationships, but it is only a component that leads to your overall well being, which should be your primary concern.

80/20 Examples

There are many economic conditions, for example the distribution of wealth and resources on planet earth, where a small percentage of the population controls the biggest chunk, which clearly demonstrate the 80/20 Rule. There are business examples such as 20 percent of employees are responsible for 80 percent of a company's output or 20 percent of customers are responsible for 80 percent of the revenues (or usually even more disparate ratios). These are not hard rules, not every company will be like this and the ratio won't be exactly 80/20, but chances are if you look at many key metrics in a business there is definitely a minority creating a majority.

At a micro level just by looking at your daily habits you can find plenty of examples where the 80/20 Rule applies. You probably make most of your phone calls to a very small amount of the people you have numbers for. You likely spend a large chunk of your money on few things (perhaps rent, mortgage payments or food). There is a good chance that you spend most of your time with only a few people from the entire pool of people you know.

I'll present to you how the 80/20 Rule applies to my life and how I have used the concept, although not always deliberately – it's just the way I construct my life (for maximum pleasure!) -to improve the efficiency of my output and enhance my overall lifestyle.

My 80/20 Life

In my life I've noticed plenty of 80/20 ratios and generally they relate to my core competencies and passions. I really enjoy writing articles such as this, recording podcasts and interacting with other business people through Skype and blogging. In terms of rewards, the two-to-four hours or so per day that I spend writing – when I'm in the creative zone and my best work comes out almost effortlessly – is my money time. My articles and podcasts work hardest to generate income for me, create business opportunities and allow me to express myself creatively. I get the most financial and intrinsic satisfaction from this time.

I expect you could tell me a similar story about your life. During times you really enjoy yourself your output is at its peak. Your passion activities probably don't pay your bills at the moment, which unfortunately means that you can't sustain your life by indulging only in what you enjoy. I'll talk more about transforming your life to a financially stable and personally fulfilling 80/20 format later in this article.

During some times in my life I struggle and waste time performing activities I don't enjoy or I am not good at. For example bookkeeping is not high on my fun list. I don't always like managing keywords in Google AdWords campaigns because I don't have the patience to thoroughly test the variables and track the numbers. The same can be said for things like Google Analytics. These activities are more numerical in basis, I'm not a numbers person so when possible I leave these tasks, along with other activities like programming, graphic design and proofreading to other people, the specialists who enjoy them.

Some of my time is spent procrastinating or working inefficiently doing activities that provide very little benefit. This often occurs when I am tired or below peak physical condition. I sometimes lack the mental throughput to motivate myself to be productive (and boy, my writing stinks when I'm tired!), but I'm working on it and getting much better at reducing time wastage. When I'm in this state it's smarter for me to study – read books and ebooks – because I'm not capable of producing quality output, but taking input – learning – is a good use of time when I am not there 100 percent mentally.

80/20 Business

When I look at one of my businesses, BetterEdit.com, it's very clear that a small handful of repeat customers account for most of the income. The customers who become longterm users, who gain the most from the services and fit well demographically and socially with the business model, are key. They provide 80 percent of the value but only represent 20 percent (or much less) of the overall people that use the business. My job is to determine the best way to attract and convert more customers into longterm users.

With blogging I learnt (and teach in my Blog Traffic Tips newsletter) that there are a handful of activities that I do every day that produce the most results. Breaking things down further, there are usually a key 20 percent of elements within an individual blog article (think article headline) that have the most dramatic affect on results. The numbers of course are not clean 80/20 ratios but there are definitely dominant factors at play.

In a business sense, finding the 80/20 ratios is crucial for maximizing performance. Find the products or services that generate the most income (the 20 percent) and drop the rest (the 80 percent) that only provide marginal benefits. Spend your time working on the parts of the business that you can improve significantly with your core skills and leave the tasks that are outside your best 20 percent to other people. Work hardest on elements that work hardest for you. Reward the best employees well, cull the worst. Drop the bad clients and focus on upselling and improving service to the best clients.

How You Can Live An 80/20 Lifestyle

When you start to analyze and breakdown your life into elements it's very easy to see 80/20 ratios all over the place. The trick, once your key happiness determinants have been identified, is to make everything work in harmony and avoid wasting time on those 80 percent activities that produce little satisfaction for you.

The message is simple enough – focus on activities that produce the best outcomes for you. This applies to both your business/working life and your "other" life (I think they are all part of your "life" but people often prefer to distinguish them). The problem for most people is how to make a living from what you really enjoy, so lets focus on that…

I'm sure you have heard the phrase "struggling artist". The stereotype where a creative person, musicians, actors, writers and artists, struggle to get discovered and work long hours on horrible day jobs, often in retail and hospitality, until hopefully they finally break out, get discovered and become famous. It shouldn't surprise you that the ratio of struggling artists who actually become famous enough to live off their craft also follows an 80/20 Rule – only a small few of the overall total manage to get that far.

The same can be said for entrepreneurs. How many of you now reading this article are working day jobs, jobs you probably don't like much, while you work hard after-hours to get your dream business up and running?

In truth, and this is a sad fact, most people in the world work jobs they don't like and only truly live their passions on weekends and outside of working hours. Only a small sample actually live their passions day in and day out, how they want to and when they want to. If you want to become one of the special few so you can live your passions on your terms there are a few things you can do.

Focus On Your Passions, Not Material Possessions

The simple fact is not everyone can be a famous artist. Not everyone will start a million dollar business. I'm not going to tell you stop striving for those goals, I'm working on them myself, however you can work smarter TODAY to find greater fulfillment, and that is what living an 80/20 lifestyle is all about. Best of all, your likelihood of becoming one of the famous artists or entrepreneurs is enhanced if you tweak your life to follow the 80/20 Rule because you tap into what you do best more often.

The first thing you must decide, and this is often the hardest step, is to determine what it is exactly you have passion for. Some people can answer this question easily – "I want to be a famous pianists/singer/poet/author", "I'd like to run my own real estate agency/coffee shop/advertising company" etc. Others may have a general idea "I don't want a day job" or "I want to run a business" but the specifics are not sorted yet. If you are not sure what your passions are all I can suggest is test yourself. It's usually easy to determine what you DON'T like so keep doing that until you find what it is you DO like.

Outputs Vs Inputs

I'd like to make a point about outputs vs inputs before moving on. Most humans are good consumers – we are good at taking inputs. Chances are you can easily rattle off a bunch of things you do enjoy about your life: eating out at nice restaurants, consuming junk food, reading books and magazines, going to parties and dance clubs, watching movies and DVDs, listening to music, meeting new people, surfing the net, having sex, playing sports and shopping. All of these activities more or less are inputs which means you consume the outputs of other people.

You may consider the activities I just mentioned passions but it's hard to find a sustainable passion if all you do is consume. To foster an 80/20 lifestyle you need to locate activities that are passions for you because you create output for others to enjoy. Yes you can get paid to have sex, watch movies, eat at restaurants and read books, but chances are you won't find it fulfilling or sustainable for very long OR you will be required to provide something back as part of your involvement – that's your output, the value you create.

It's okay to love eating out at restaurants and claiming your passion is food, if your intention is to also create output by starting your own restaurant, or a restaurant reviews website or a newsletter or magazine or becoming a chef. If you enjoy listening to music you might also enjoy producing your own music or covering the music industry as a journalist on your own blog.

Only by producing output for other people to enjoy or make practical use of can you expect to convert a passion into a sustainable income. You should understand this already as I suspect the times in your life that you have created something for others or worked on something that benefited other people you experienced the most fulfillment. If you suffer from a lack of direction now, if you are depressed because you don't even know what your passions are to start applying the 80/20 Rule to, you need to do one thing – start being creative and giving back – produce output! You won't find fulfillment only by consuming.

An 80/20 Lifestyle Blueprint

To start living 80/20 today you have only to do one thing – focus your energies on what you enjoy.

Part time work – Part time passion

Many people work a full time job and work after hours on a business or hobby or creative talent. If this is you I suspect your ratio is not 80/20 and probably closer to 20/80. You spend way too much time at a job you don't like, you are probably not very motivated to do it well so you don't fall into the vital 80/20 employees for that company, and by the time you get home you are too exhausted to spend time on your passion. You feel like you are getting nowhere fast. This lifestyle is not good for anyone since all the relationships fall into the 80 percent that produce 20 percent of the value. You get very little from it and the people you work for get very little from you.

If this currently describes your situation what you need to do is start changing those ratios. Reduce the amount of time you spend at a job you don't like and increase the amount of time you spend on your passion. You may say you can't do that because you need the money but I suspect you don't really need as much as you think you do. Most people can live off part time work but choose to work more because they want more things. You may see your peers enjoying material goods which creates desires in you. Your wants start to outweigh your needs, which is probably the biggest pitfall in our modern, advertising driven, materialistic society.

I'm not saying you have to live like a pauper but I know that your real happiness comes from spending time doing things you enjoy the most, not from earning more money. Chasing the dollar for the sake of the dollar does not work. Chasing passion often leads to a greater income because the quality of your output is so much higher. Focus your energy on increasing investment in your core strengths and you will reap rewards.

Drop your working hours to three days per week and spend more time attracting more clients, booking more singing gigs, finding more time to write your novel or to develop your invention or code your software or find investors or whatever it is you really want to do.

For those of you who have no intention of turning your passions into money generating enterprises this is still a good option. If money isn't your primary concern but your music is, why do you spend so much time working to earn more money than you need? Yes you need to plan for the future and build assets, but clearly for your musical soul it's not something that needs to take the majority of your time and energy. You can be happy without that mansion by the sea and you never know, if you spent more time on your music the eventual album sales may one day lead to that mansion by the sea. If not, at least you will be a lot happier for following your enthusiasm rather than the dollar.

If financial freedom is important to you and a big part of your plans look at this step as phase one and work to convert your passions into income generating propositions. Grow your business client-by-client, gig-by-gig or sale-by-sale. keep adjusting your work vs passion time ratio as your business grows to support you and you no longer need your job income. Look for 80/20 activities in everything you do and drop any inefficiencies as soon as you can.

Don't Let Fear Stop You

The biggest factor that stops most people from chasing their dreams and working towards their real goals is fear. Fear of the lack of security, the reduced paycheck and of the unknown future keeps people locked into routines that are not satisfying. That path leads to sadness, depression, poor health, low income and ultimately an early death. Who wants that!

Don't let fear be the reason for not achieving your goals. Stop, reassess your real passions, remove the money equation long enough so you can think without worrying about finances, and make plans to move towards your 80/20 lifestyle activities. Maximize what you are good at. Find the activities that produce the most results for you and your business and put your energy where the big rewards are.


Yaro Starak
80/20 Optimizer