What is 80/20 and Why It's Your Key to Business Growth

All right, so we have a little treat for you. So this is a coaching call from the Agency Owners Association. This is a group that Neil and I have for agency owners to help you grow faster. So if you're in the agency space, you are a services business, this is applicable to you. It's a little preview of a call. It's probably 10, 15 minutes or so, and you get a sense for what it looks like to be in the group. If you want to learn more about the group, you can go to marketingschool.io/agency. Again, it's marketingschool.io/agency. Hope you enjoy the episode.

Hello, welcome to another masterclass for the AOA. I'm excited to introduce our guest today. He's actually one of the most expensive business strategists in the world. He started way back in, correct me if I'm wrong, like 2001, after the company you were working for got bought out and you started a marketing consultancy. After getting into this, you published what, like 10 books on Google AdWords? The 80/20 principle of sales and marketing. I know that you started a foundation. There's a foundation on cancer research. There's the $10 million Evolution 2.0 prize. There's so much that you're doing with your life, Perry. I'm so excited that you're here and here to give us an interactive presentation today. Please help me welcome Perry Marshall.

So greetings everybody. Good to see you all. When I was a sales manager at a software company, I was probably about 30. I'm 55 now. I read in this book that 80% of your business comes from 20% of your customers and the other 20% of your business comes from 80% of the customers. And I thought, is that right? And I literally printed out a QuickBooks report from biggest customer to smallest customer. And I went down through it. And sure enough, by the time I was 20% through that report, that was 80% of the money. And then the rest of it was all a tail. And I thought, oh, that's neat. And then I don't really think I did anything about it. I got it, but I didn't really get it. And I remember I had this one customer. It was this company in Des Moines, and I was selling this hardware and software. They only spent like $3,000 a year, let's say. And, you know, we were like a $2 million company. So, like, not a big customer. And the guy would always say, you know, if you don't add this feature, I'm just going to buy from your competitor. And I would get caught up in this. Oh, well, you know, then I would go to the software team and I'd say, hey, you know, we need this feature. And what I should have done if I understood 80/20 was I should have said, dude, go buy from the competitor. You're only spending $3,000 a year anyway. Or I might not have said you're only spending $3,000 a year. And then I would have gone and found a bigger customer that wanted to buy what we already had instead of hassling my software developers. And the point being that I didn't really get it. But let me tell you when I did get it. Fast forward probably 2 or 3 years, I'm in a coffee shop and I'm reading Richard Koch's book, The 80/20 Principle, which had been highly recommended to me. So, now, I'm actually reading a whole book about 80/20 instead of some sales book that happens to mention it. So, I'm kind of immersed in the idea. And he said this thing that just punched me in the face. He said, 80/20 has a lot to do with fractals and chaos theory. Well, chaos theory, I had a book about that. And chaos theory is, it's when scientists ask a question like, why is it that, like, on the right day, So let's say Austin's right behind Austin back there, those mountains that if you walked up that mountain on the right day at the right moment and clapped your hands, 500,000 tons of snow would avalanche down a mountain, and that that tiny little pinprick would just. It could bury an entire house. And like, Southern California is not having a real good time right now. Like, there was a match or, you know, something got overheated somewhere and boom, Southern California is on fire. What he was saying, what I thought he might be saying, was 80/20 is the math of that.

Woo!

Oh, that woo! That's a big deal. Is that true? If that's true, it means there's an 80/20 inside of every 80/20. It means not only do 20% of your customers produce 80% of your business, 20% of the 20% produce 80% of the 80%. So there are— are there any propeller heads in here that can type in the chat? So if 20% of 20% produces 80% of 80%, what's 20% of 20%?

What is it?

What's 20% of 20%? 4%. What's 80% of 80%?

Let's see.

Who knows what 80% of 80% is? 0.8 times 0.8 is what? Anybody? 64. It means 4% of your customers produce 64% of your business. And it's true again, 20% of 20% of 20% produce 80% of 80% of 80%. And so, if you put this on a chart, it looks like this. And this right side goes up like crazy. And you know what this means? This means it's like a law of the universe that somebody is going to be as rich as Elon Musk. It's a law of the universe that Fortune 500 companies are going to be a certain size. It's, it's as predictable as the sun rising in the morning, but nobody had ever pointed this out. And my brain set on fire. And I went home and I was like, is this right? So, at that time, I was about 18 months into my first business. How many of you have been 18 months into your first business at some point in your life? What's it like a year and a half into your business? Could somebody type in the chat like, What's that roughly like? Is it like chaos, scrambling? Maybe I've got a few clients, but I kind of need a few more. Things are sort of working. They're probably— we're not getting rich yet, but, you know, wing and a prayer. This is where I'm at. So, I'm like, when I'm reading a business book like this, I am seriously paying attention. And I ran home and I'm like, I started looking. I started looking at my web traffic and my email list and my opt-ins. And I'm like, oh my word, everything is 80/20.

All of it.

Adam said, I'm there right now, scrambled eggs for brains. Things are working, yes, but no plan to scale. Yeah, man. Truth. Too much momentum and not enough driving skill. A fun roller coaster, but don't know if the wheels are going to fall off or not. Chaos and fast growth. Still figuring it out. Chaos and fires. Optimistic, but got to do more. This is where I was at. And I was like, whoa, because I could go from the top down to the bottom. I had a biggest client. I had a second biggest client. I had a third biggest client. I had people who requested free information. I had people that requested free information and bought something. I had a whole bunch of people that didn't. I had people that visited my website but didn't request the free information. It was 80/20 all the way through. And I'm like, oh my word, I just think I figured out the secret of the universe. You could predict the future with this. This isn't just a rearview mirror thing, and it's also not just a business thing. It's a law of the universe. 80% of the traffic runs on 20% of the roads, and 80% of the dirt is on 20% of your carpet, and 80% of the light is from 20% of the stars at night, and on and on. Like, this is everywhere. And I— so I— Emailed my biggest client the next Monday. And I said, this is everything. This is everywhere. We are going to do an 80/20 analysis on your business and we're going to start fixing things up. And I spent the next 3 years, like not 3 weeks, like 3 years doing 80/20s on my biggest client. And growing their business. So, I'll give you an example. At that time, so this is like 2003, my biggest client was buying mailing lists from 16 mailing list brokers and mailing out 1 million catalogs. And it cost them a lot of money to mail out a million catalogs. And I said, you know what, guys? 80% of the money is on 20% of these mailing lists. I know this. This is a fact. I don't have to know anything about all those mailing lists. I absolutely know it's a fact just from 80/20. There is more money in 3 of those mailing lists than there is on the other 13, and we are going to figure out which ones they are. So what we did— so they didn't have any way to figure out which mailing list a customer had come from because the way the mailing list industry works. So, what we did was we mailed postcards to those lists and we tested them. And we found that 80% of the responses came from 20%. And so, we chopped it down to, I think it might have been 5 mailing lists. And we mailed a quarter of a million catalogs twice. To the same people. And they cut the cost of mailing the catalogs in half and the response went up. That's how you apply 80/20. It will totally change your life. So, let me tell you a story. And then, I'm going to— when I'm done with this story, I'm going to kind of ask for a little feedback and direction because there's a lot of directions I could go with this. So I just want you to kind of be thinking about, and Austin especially, like, where might we, we go after this? So I have a friend named John Paul Mendoza, and when he was 17, he went to Catholic school in Denver, Colorado. He dropped out of Catholic school. He hitchhiked to Las Vegas. He got himself a fake ID. And became a professional gambler, going to the casinos, playing poker every day. Now, his mother was thrilled about this, absolutely thrilled. So he is living by his wits, and after about three weeks, he's like, "This is a lot harder than I thought it was going to be." So he goes to a bookstore with gambling books. He's looking at all the gambling books in the bookstore. And he gets into a conversation with this guy named Rob. He finds out that Rob is a professional gambler. Hey, Rob, do you think you could teach me what you guys do? For a percentage of your winnings, we could teach you what we do.

Okay.

They shake.

Jump in the Jeep, John. We're going for a ride. So they go down the highway. John says, so, Rob, how do I win more poker games? And Rob goes, you have to play people who are going to lose. You need the kid from Wichita who's 18 years old, who got $5,000 from his grandmother, and he's going to go to Las Vegas and get rich. And that person is called a mark. Well, where do I find marks? I'll show you. He pulls into a parking lot of a strip club. They walk into a strip club. There's women, there's rock and roll, there's loud music, there's biker dudes all over the place. Rob sits John down at a table. He pulls a sawed-off shotgun out of his jacket. And he holds it under the table, and he opens it up, and then he slams it shut. So it goes in the middle of this loud club, and there's a few dudes over there in the corner that turn around like, "Hey, who made that noise?" And the owner comes over. Hey, what's going on over here? It's all right. Just teaching the lad a lesson. John, did you see those biker dudes turn around when they heard that noise?

Yeah.

Don't play poker with them. They are not marks. You play poker with everybody else. Everything you do as an entrepreneur, as a marketer, as a salesperson, Is racking the shotgun. Everything. You send an email, some people open it, some people don't.

Rack the shotgun.

Some people click on the link, some people don't. Some people get on the Zoom and some people don't. Some people buy the stuff and some of them don't. Some of them show up for the next Zoom meeting and some of them don't. 80/20, 80/20. Rack the shotgun, rack the shotgun. And what 80/20 tells you is everybody is obsessing about the people that did not turn their head. Or the people that did not buy, or the people that did not sign up, or did not show up. 80/20 tells you the people that did are 16 times more likely to spend money than the people that didn't. And 20% of those are 64 times more likely to spend money. And 20% of those are 250 times more likely to spend money. So, if you're running your business right, half of your business comes from 1% of your customers. And we just finished 2024. I'm going to ask you guys a question. I want you to think about this, and I want an answer. I bet half the money. You made last year, you actually made in about three days. True or false?

Half.

The best half. Most profitable half. What do you think? You don't have to agree with me. Am I right? A phone call, a negotiation. You bumped into somebody. One day, a really big customer showed up. And whatever you did with them, it didn't take very long. Probably close to half your money you made in less than a week if you add it all up.

If you're an agency owner looking to break high 7 figures, 8 figures, or even 9 figures, the Agency Owners Association is for you. It's ran by my partner Neil Patel and myself, and we've been there, done that from an agency standpoint. And if you want to learn more about it, if you want You want to grow faster, get more clients, take yourself out of the day-to-day, just go to marketingschool.io/agency to learn more.

Well, like closing the deal. So, you know, you didn't spend all your time fulfilling last year and you didn't spend all of your time chasing deals, but the deals you chased, About half of them took about three days of work. Like making money is either really easy or really hard. There's not a lot of in between. So when you realize this, this like scrambles your brain. Oh my word! People are wasting incredible amounts of time doing all kinds of stuff that, like most of us. We were basically raised to look busy. Just look busy. As long as you look busy, as long as you feel busy, you're not a bad guy. But man, don't let anybody catch you just laying around, man.

That's not—

that's no good.

True?

Absolutely.

Looking busy doesn't make you money. Not usually. Maybe once in a while it does. But man, man, you're an entrepreneur. It's about being effective. So, I've been talking for about 20 minutes. I could go on a different tangent, but let's just get a little feedback from all of you. What is this kicking loose for you?

I think for me, um, it's looking at it from a whole different angle. I think we do get caught up in the way we do things and how we do things and when we do things. And, um, I, uh, I mean, I, I follow a lot of your stuff, so when I need, when I need fresh perspective, I'm usually looking at Perry Marshall. So, um, but yeah, it's making me definitely— I agree with you. If I look at the deals, the big, you know, most of my clients are recurring, so it took me a sec to process that. But actually closing the deal, talk— like finding them, getting the deal done, I'd say a week, you know, uh, worth of work. Yeah, totally.

So one thing that I struggle with listening to this is to the, you know, the doubling down on the really large clients versus having a balanced portfolio, because I think one of the things that agencies struggle with, and I've kind of gone back and forth on this model, is when you have really big clients, and inevitably at some point those really big clients are gonna move in a different direction. And then you have to fire a bunch of people, which is kind of, you know, I've gone down that path. It's not a, not a fun time, not a fun model versus if you have a structure where you have some big clients, but you kind of round out the portfolio with some smaller clients so that if a big one moves on, it doesn't completely crush your business, and you don't have to, you know, put a bunch of people out on the street. You know, it's a little bit like investing, right? Like, you know, we might say that Nvidia is like one of the biggest, hottest stocks right now. So should we put 100% of our 401 into Nvidia?

Probably not.

We probably want to diversify. So that's kind of what I struggle with with clients. I'd love to get your perspective on that.

So my perspective on— so the really painful part of of catering to the top 1% client is it's volatile and like they could suddenly stop and then you can't keep your employees and now you're in trouble. And then if you try to keep them and the client's gone, then you're losing a bunch of money, right? So, I think the 80/20 way to think about this is that— so, 80/20 says that it's inevitable that the world is volatile and that these tippy-top profit zones are— they really are much lower friction than everything else while they work. And so I say the question is, how do you structure your team so that when business goes up and down, you can ratchet their hours up and down and not violate expectations? Um, a lot of people I know solve this by having contractors. Like, it has always been the case in my business that my very best people have multiple gigs, and rather than thinking of them as exclusively mine, I benefit from the fact that their other gigs and their other activities feed more ideas and diversity of opinions into their life than if they just worked for me. I also think that, that this is something that you set at the very beginning of the relationship. And I'd also like to talk about hiring a little bit too, because there are a lot of dimensions to this. If you hire somebody and you say, and they're a 1099, you say, here's how our business works. When business is good, we pay you really well. And sometimes a client goes away and I have less work for you. So, I don't want to be your sole means of support. But as long as we're okay that I'm not your sole means of support, I'll pay you well when I can use you. And I just want you to give me a certain level of priority. Now, there's another thing about hiring that I think is super important. Hiring is not an interview, it's an audition. I think this is a really big deal. You would never just interview a bass player or interview an actor. You'd want to see them play the bass or act. But it's amazing how many companies hire somebody without ever giving them something to do and watching them do it. And so, you know, for some positions, it might make sense to bring them in for an afternoon and give them some jobs to do. For other companies, it might make sense to hire them for 2 months and say, this is a 60-day temporary, like, no foul, no fault. If I don't like you or if you don't like me, either of us can just back out of this and there's no shame in it. I think there's a lot of hiring situations where there's this— it's never said out loud or stated explicitly, but there's kind of this— this vague expectation that now that I work for you, you're responsible for me for the rest of my life or something like that. And if you hire somebody, you say, hey, we're going to try things out for 60 days. And if I don't like you or I don't like me, it's not like a black mark on your record. It just didn't work. And then you're also recognizing another thing about 80/20, which is, let's say we're talking about salespeople. This could really be any job.

Yeah.

But if you hire 10 salespeople, I guarantee you 80/20 says 2 of them will outsell the other 8. It's basically a law of the universe that 2 will outsell the other 8. And you should really look like it. Your job is to figure out which 2 out of the 10 they are, not to hire 10 people, but to like try 10 and keep 2.

Yeah.

Jack Welch, when he was running GE, he just fired the bottom 10% of his staff every year. That's very 80/20. Also, 10% of your staff, 10% of your products, 10% of your clients are actually losing you money, not making you money. That's almost always true. 80/20 says it's about what you don't do. It's about what you cut out. It's about what you eliminate. Because bad clients cost more money to service than what you actually make. Bad products— almost every company, 10% of their product line, they are taping dollar bills to every box that goes out the door, and they don't even know it. They, they haven't done the cost analysis and they haven't figured out the more of these we sell, the more money we lose. So give me some feedback. That was a long answer to a short question.

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Diane, to your point about client concentration, I used to have a CFO who would harp on that all the time. And then I spoke to big consulting companies and actually you, brought up a good point of Nvidia. Actually, Nvidia's in 2023, 46% of their revenue came from 4 mystery customers who they won't say who it is, but if you had to guess, you probably guessed Facebook, Google, and a bunch of other companies. So even Nvidia, worth a ton of money, public company and shareholders, 46% of their revenue comes from 4 customers. Accenture is the same. You know, they have their platinum clients who are billions and billions of dollars. So it seems like even with products and services and whatever, you just don't— no matter how big, you can't— that rule 80/20 still applies.

Yeah, I agree with that. And I mean, we rank our clients as well. So, you know, based— we kind of group them into a, you know, a number category based on their— the revenue that they bring into the business. And so the team knows that, you know, you work on a number 1 client, before you work on a number 3 client. You know, they're grouped and they're managed differently. But, you know, so we're, and we've kind of separated that part. We actually have a separate P&L for our, like a little mini P&L for our smaller clients because I wanna make sure that we're not overdelivering. But would I wanna just cut that P&L completely out of the business? No, if we can continue to deliver it profitably, then You know, we'll, we'll do it. I just don't, you know, we don't, I think in the past we got more in trouble when, you know, you, we weren't separating clients and everyone was a number 1 and you just, you can't run a business like that.

Absolutely. You have to be very clear about who the good clients are, who the profitable clients are. Here's another version of what I just said. When I hire people on Upwork, which I do quite a bit, I will very often hire 5 or 6. I'll give them all the same project and then I'll watch what they do. And invariably, 1 or 2 of them are way better than the other 6. And then, so I spent what, $50, $100, $150 on each of the ones that didn't really work out. And now I know which ones are really good and then we just give them more hours and press forward. And it's so tempting to think that you could just read somebody's resume or whatever and pick them. It's like, no, audition, not interview.

Yeah, I have a question, Perry. In the riveting story, my neck was starting to hurt because I was nodding along. With racking the shotgun at the strip club. When, when you say rack the shotgun, you mentioned like emails, probably posting on social media. You know, how can we, based on what we're doing now, take a look at the assets that we're putting out into the marketplace and actually do an analysis of the top 20% or the top 4% of the people that we want to serve And actually take that analysis and then shift it into the output, which is the racking of the shotgun? Like, is there a process or how would you do that tactically?

Yeah. So, when I told you that story about suddenly realizing everything was 80/20 a year and a half into my first business, that was probably within 3 months later. I was starting to write the first Google advertising book. And you have to remember that back then, Google was not the 800-pound gorilla that owned the internet. They were this kind of up-and-coming weird little, you know, search engine with, with, without a whole bunch of stuff on their homepage. And I figured out pretty quick Getting a Google ad campaign to work is all 80/20. Same with Facebook, same with LinkedIn, same with Instagram or, or YouTube or any advertising platform online. You have impressions, you have clicks, you have conversions, you have ads, videos, whatever they are. All of it is 80/20. And really all I did in, in the Google and Facebook books, which are the best-selling books on internet advertising, really all I did without really telling people what I was doing was I was showing them how to find the top 1%, 5%, top 20%, 80/20 levers in the ads, in the process of testing the ads. In the click-through rates, the impressions, the keywords, the audiences, all of it was 80/20. And it— there was always a positive 80/20 end of the spectrum, and then there was a negative 80/20 end of the spectrum. There's the keywords and the ads that are making you the most money and the ones that are losing you money, and you have to track it all the way to conversions. You can't just go on clicks. And that's it. And, and if, if you just go through an ad campaign in all the different dimensions and you figure out, so what are the most positive 80/20 levers that I'm, I'm gonna pour more gas on the fire here? And what are the negative 80/20 levers where I'm gonna delete these keywords or delete these ads or stop showing ads to these audiences here? And then I'm going to take the money that I was losing and I'm going to put it where I'm making it. And I just keep rinse, repeat, rinse, repeat, rinse, repeat. And then another— and so like every, every time you get an impression or a click or a visitor to your website, every one of those things is a tiny little rack the shotgun moment. Furthermore, you should always be asking, how can I watch other people rack the shotgun so I don't have to do it and I don't have to spend my money and still see whose head is turning? So can I do a JV with an affiliate who's already spent tons of money acquiring an audience and getting fans. And can I get the top 1%, 5%, 20% of their fans to come and take a look at what I'm doing instead of going to that mountain behind Austin and with a shovel and, you know, trying to dig coal out of a hard rock? So does that shed any light on your question?

Yeah, definitely. It's like the top 20% of what's already working. We've had some conversations about like raising pricing or making like an exclusive offer or something that's like at the top tier. Are there ways that we can look at the assets that we have and figure out how To bolster them to yes, yes.

In fact, is that the espresso machine? Yes.

Constant. Yeah. Okay.

Yeah.

I was gonna ask you that too.

In fact, I want to. I'm gonna give you guys a link, and I'm gonna share my screen. Austin, if I'm not already a co-host, make it so that I can share my screen. And I will show you a tool right on the screen where you can do this. This is a perfect question at the perfect time. So, you should be able to share.

Let me know if you can.

All right, here we're going to share screen. All right, on my website, I have It's called an Espresso Machine Wizard. So let me explain espresso machine. So in my book, 80/20 Sales and Marketing, there's a chapter called The Principle of the $2,700 Espresso Machine. And what that says is for every $1,000—