Thread
Whether you are buying a business or growing a business, you need to know what to focus on.
A tool I use is called "Price's Law" & it helps me know what to focus on. It has helped me go on to buy many businesses & scale a company I founded.
Here are 12 examples on it 🧵👇
A tool I use is called "Price's Law" & it helps me know what to focus on. It has helped me go on to buy many businesses & scale a company I founded.
Here are 12 examples on it 🧵👇
1. First off, what is Price's Law?
It states that 1/2 of the output of any domain is attributed to the square root of the participants.
If you have heard of the Pareto Principle, this is a derivation of that. You can isolate the 50% of the 80%.
It states that 1/2 of the output of any domain is attributed to the square root of the participants.
If you have heard of the Pareto Principle, this is a derivation of that. You can isolate the 50% of the 80%.
2. Non-business examples
-Thus, if 100 papers are written by 25 authors, five authors will have contributed 50 papers
- 1/2 of the mass of all stars are from the √ of all stars
- 1/2 of the home runs are from the √ of all hitters
-1/2 of books sold are from the √authors
-Thus, if 100 papers are written by 25 authors, five authors will have contributed 50 papers
- 1/2 of the mass of all stars are from the √ of all stars
- 1/2 of the home runs are from the √ of all hitters
-1/2 of books sold are from the √authors
3. What does this mean for business
- half of the results for your company are responsible for the square root of your employees
So
for a 10 person company , 3 people cause 1/2 of the results
for a 100 person company, 10 people cause 1/2 of the results
Same for Sales
- half of the results for your company are responsible for the square root of your employees
So
for a 10 person company , 3 people cause 1/2 of the results
for a 100 person company, 10 people cause 1/2 of the results
Same for Sales
4. Bigger you get, the smaller the % that cause 1/2 of the results
In a 10 person company, 33% cause 50% of the results 3 out of 10.
In a 1000 person company, 3.2% cause 50% of the results or 32 out of 1000.
In a 10 person company, 33% cause 50% of the results 3 out of 10.
In a 1000 person company, 3.2% cause 50% of the results or 32 out of 1000.
5. How do I use this
I think its very helpful to know who causes 50% of the results.
If you are buying a 9 person company, the owner and his wife could result in in 66% of the 50%. (2/3). You have to get comfortable at understanding what they do & be able duplicate actions
I think its very helpful to know who causes 50% of the results.
If you are buying a 9 person company, the owner and his wife could result in in 66% of the 50%. (2/3). You have to get comfortable at understanding what they do & be able duplicate actions
6. Evaluating a business
If I meet a business owner with 50 employees. One of the first questions I ask is tell me about your top 6 employees.
I assume 7 produce 1/2 of the results (minus the owner) & I want to know what the top 6 do.
If I meet a business owner with 50 employees. One of the first questions I ask is tell me about your top 6 employees.
I assume 7 produce 1/2 of the results (minus the owner) & I want to know what the top 6 do.
7. Focus on understanding how those 7 produce 1/2 of the results
- What are they accountable for
-What actions are they doing on a weekly basis
-Is the owner part of the 7?
-can you replace the owner?
-can you retain the 7
-how long have they been there
-can you improve the 7
- What are they accountable for
-What actions are they doing on a weekly basis
-Is the owner part of the 7?
-can you replace the owner?
-can you retain the 7
-how long have they been there
-can you improve the 7
8. Invert it
What 7 are causing 1/2 of the problems
What 7 are lowering your average
Can you replace your bottom 7 with a new 7 that raises your average,
Also, how can you segment it or set it up so that you can double your 7 most productive, its just a rule of thumb
What 7 are causing 1/2 of the problems
What 7 are lowering your average
Can you replace your bottom 7 with a new 7 that raises your average,
Also, how can you segment it or set it up so that you can double your 7 most productive, its just a rule of thumb
9. Don't just apply it to employees
Say if you have 100 customers, I bet 10 are creating half of the profit.
If I hear that there are 100 customers, my mind goes to , who are the 10.
If there are 250, my mind goes to who are the 16.
Say if you have 100 customers, I bet 10 are creating half of the profit.
If I hear that there are 100 customers, my mind goes to , who are the 10.
If there are 250, my mind goes to who are the 16.
10. Why not just use the Pareto principle?
Imagine there are 1000 in a domain , its easier to find 32, vs. finding 200. 200 is not practical.
This is why I like Price's Law vs. the Pareto principle.
Imagine there are 1000 in a domain , its easier to find 32, vs. finding 200. 200 is not practical.
This is why I like Price's Law vs. the Pareto principle.
11. Other examples
A recent deal, we raised equity from investors on our investor list.
33 investors from our investor list put up the equity for this deal.
Take a guess how many of those investors contributed 50% of the equity....results on next tweet.
A recent deal, we raised equity from investors on our investor list.
33 investors from our investor list put up the equity for this deal.
Take a guess how many of those investors contributed 50% of the equity....results on next tweet.
6 Investors
They put up a little more than 1/2 the equity. Makes sense b/c the square root of 33 is 5.74
If I were to raise 10M on a new deal. I would guess that 5M would come from about 6 investors, & there would be many more 100k-500k checks to get to that 10M.
They put up a little more than 1/2 the equity. Makes sense b/c the square root of 33 is 5.74
If I were to raise 10M on a new deal. I would guess that 5M would come from about 6 investors, & there would be many more 100k-500k checks to get to that 10M.
12. Keep in mind, this is a rule of thumb and not a scientific fact.
I think 1/2 of the work & 1/2 of results are two different things.
Sometimes setting a meta system or game for others to play produces more results than those that perform the action to produce the results
I think 1/2 of the work & 1/2 of results are two different things.
Sometimes setting a meta system or game for others to play produces more results than those that perform the action to produce the results
If you know of any of these for sale, would love an intro
HVAC
Plumbing
Landscaping
Collision Centers
Vocational Education
Roofing Companies
Dental Offices
Will very much appreciate it if you know of one of these for sale
Goal is to buy 40 this year, 3 down, 37 to go.
HVAC
Plumbing
Landscaping
Collision Centers
Vocational Education
Roofing Companies
Dental Offices
Will very much appreciate it if you know of one of these for sale
Goal is to buy 40 this year, 3 down, 37 to go.
(h/t) to @jordanbpeterson for this law. I heard about it years ago on one of his youtube lectures.
I've also heard it called the "square root law" and the Matthew Principle.
I've also heard it called the "square root law" and the Matthew Principle.
@jordanbpeterson Re-Tweets are the Best Compliment!
1. Follow me @thomasince for more of these
2. To get involved @lpfirstcapital
1. Follow me @thomasince for more of these
2. To get involved @lpfirstcapital
Mentions
See All
Shaan Puri @ShaanVP
·
Feb 5, 2023
Great thread