It started in the vegetable garden

Do you recognise this man? He’s my friend Wilf. Wilf and I have never met, but I call him my friend because we’re like two peas in a pod – we both love numbers. It started (for him) in the late 1880s when he was working in his vegetable garden and made an interesting discovery: he noticed that a tiny number of pea pods in his garden produced the majority of the peas.

At the time, Wilf (or Vilfredo Pareto to give him he full name) was studying wealth in various nations. As he was Italian, he began by analysing the distribution of wealth in Italy. To his surprise, he discovered that approximately 80 percent of the land in Italy was owned by just 20 percent of the people. Similar to the pea pods in his garden, most of the resources were controlled by a minority of the players.

The rest is history and in the decades that followed, Pareto’s work – and the resulting 80/20 rule – practically became gospel for economists. Once he opened the world’s eyes to this idea, people started seeing it everywhere. And the 80/20 rule is more prevalent now than ever before.

The more interesting question, however, is why does this happen and why is it relevant to your entrepreneurial business?

Because the answer to that might just transform the way you think about business and your business itself.

Consider this: Businesses compete for the same customer. Television shows compete for your attention at prime time. Politicians compete for the same votes. Authors compete for the same spot at the top of the best-seller list. Athletes compete for the same gold medal. And the ones that are slightly better than the competition get the top slot.

Being just a little bit better than the competition can lead to extraordinary rewards because the winner takes all. You only win by one percent or one second or one pound, but you capture one hundred percent of the victory. The advantage of being a little bit better is not a little bit more reward, but the entire reward. The winner gets all and the rest get zero.

It’s like the story of the two hunters in the forest who come face to face with a tiger. One hunter starts to pull on his trainers. “Don’t be silly” says his friend. “You can’t outrun a tiger”. “I don’t need to” comes the reply. “I just need to outrun you”.

Where your performance relative to those around you is the determining factor in your success, small differences in performance lead to exceptional rewards.

From this advantageous position—with the gold medal in hand or with cash in the bank, the winner begins the process of accumulating advantages that make it easier for them to win the next time around. What began as a small margin is starting to trend toward the 80/20 rule.

If one business has a technology that is more innovative than another, then more people will buy their products. As the business makes more money, they can invest in additional technology, pay higher salaries, and hire better people. By the time the competition catches up, there are other reasons for customers to stick with the first business. Soon, one company dominates the market.

The margin between good and great is narrower than it seems. What begins as a slight edge over the competition compounds. Winning one competition improves your odds of winning the next. Each additional cycle further cements the status of those at the top.

So you see you only need to be slightly better than your competition, but if you are able to maintain a slight edge today and tomorrow and the day after that, then you can repeat the process of winning by just a little bit over and over again.

Economists call this the “1 Percent Rule”. The 1 Percent Rule states that over time the majority of the rewards in a given field will accumulate to the people, teams, and organisations that maintain a 1 percent advantage over their competitors. You don’t need to be twice as good to get twice the results. You just need to be slightly better.

Makes you think doesn’t it?

Noel Guilford, Principal at Guilford Accounting
Noel Guilford is the principal of Guilford Accounting a small business accountancy practice specialising in advising owner-managed businesses on current accounting, finance, and tax matters. You can reach him via email at noel@guilfordaccounting.co.uk or by phone at 01244 660866. He is the author of the 'Figure it out - an entrepreneurs guide to understanding your business numbers' which you can obtain by visiting guilfordaccounting.co.uk.​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ His latest book, How to Build a Successful Business' will be published in 2018.

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