business

The 80/20 Principle: It’s just a rule of thumb

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not one of the ten commandments… Read on.

Ade’s blog just recently posted about the 80/20 rule and how it applies to bloggers. In this post, I would like to point out some of the reasons why I think the 80/20 rule may be flawed, and you’d be wise to consider NOT applying it to your blog’s readers.

An introduction: What is 80/20?

Wikipedia has a great article on the 80/20 otherwise known as Pareto’s principle. The principle was greatly popularized by a recent book called: The 80/20 Principle by Richard Koch. Good book, good reading. In summary, 80/20 states that the majority of results will come from the minority of inputs. In particular, 80% of sales in a bookstore will come from 20% of customers. There are many examples that you can find. While the numbers 80/20 are approximate, other variations have been seen, too, including 90/10, 70/30, etc. It is now being treated as a rule of thumb in many industries, and being applied in a number of diverse situations.

It’s a rule of thumb, not a rule!

The recording companies, principally the big 4, have been adopting this principle over the last few years with their back catalogues which have shrunk somewhat as artists have been eliminated who don’t reach certain mass market metrics. Now I was thinking about the 80/20 rule and it may or may not be true in some circumstances, but I would argue that in some situations, esp. like the CD industry, it’s a bad idea for a number of reasons.

Let’s examine CD purchases: logic dictates that you should only stock the top 20% of CDs. In some situations this may be fine if there’s limited stock space or some other important limitation. BUT a significant number of purchasers would probably buy a top 20% CD AND another CD of a lesser known artist. You then lose the CD sale for BOTH CDs not just one. Why? Well, as the CD companies are discovering: shoppers tend to buy multiple CDs at one time, and may shop frequently. With the top 20% of CDs on sale, such frequent shoppers would quickly buy the top 20% and then not have any more to buy. Result: they begin to shop elsewhere, where they buy the CDs that they can’t get in the bigger shop, and at the same time they’ll buy the popular CDs too.

For the shop, this is bad business: they lose the top quality purchasers who buy multiple CDs at a time. They therefore have to start increasing their advertising to attract those shoppers who only buy the top 20% of CDs, and those shoppers may only shop occasionally, may be more price sensitive, and may not be loyal to any particular CD store or chain of stores. Worse comes when even the marginally popular CDs are dropped as the store further refines its stock of CDs. Previously when third-tier CDs were dropped, sales may have risen incrementally, as some customers bought more second- and first-tier CDs. This effect would have been temporary as regular purchasers would soon find not much new to buy as most new artists would start out as third-tier or lower before being ‘discovered’ by shoppers.

So the store decides that with deteriorating sales in its CDs it has to boost its margins by shifting more copies of the top tier artists. It increases promotions, cuts second-tier CDs, and lo and behold, the sales and margins rise magically again. But worse is to come: customers begin buying fewer CDs (they either already have the ones they want or they don’t care for some of the artists) and regular customers become scarce. After the promotions are over, it’s difficult to get regular customers to come back, and the top spenders are now going elsewhere for their CDs.

So, it looks like the CDs/music market is declining, and the management is left with little choice but to scale back the CDs even more or close the store.

Of course, downloading (legal and otherwise) came along at a time when the CD industry was already in bad shape. Downloading and alternative mediums for music (online radio, ringtones, etc.), not to mention alternative sources for entertainment, all coincided to make things really difficult for CD companies. But to cut your catalogues and reduce your roster of artists is now looking to be one of the ways in which the big four cut their own throats.

The 80/20 principle sounds like a logical way of thinking until you realize that if you start to pursue the top 20, you will quickly lose a lot more incidental sales. And some of the incidental sales MAY just turn out to be the top 20% of purchasers in the future…

And for bloggers: should you follow the lead?

While the principle may be in principle correct, ignoring the 80% of your readers may lead to erosion of your blog income. Why? Because when readers click away from your blog, it’s usually through an advertisement. Hence, to maximize your blog’s income, you need to encourage your readers to love it, enjoy it (briefly) then click away to a Google Ad, affiliate link or other advertising. It’s likely that if you just focus on the 20% of your readers, your expenses will rise as a result of increasing usage your server’s power power, and your income will go down as regular readers become ad/affiliate link blind.

There are many people who do not seek to make any money out of their blogs at all. Power to them! Well done! There are bloggers like me who started before making money on a blog was possible, but have found the dollar signs an additional benefit. However, for both kinds, increasing readers is a great benefit, if the blogger can afford to pay for the hosting costs. If you cut into your revenue streams, then you’ll find that you will be paying the costs for your regular readers. If you are doing it as a hobby, perhaps that is appropriate for you. But perhaps not.

Overall, I am becoming a very anti-80/20 activist. I think focusing on such goals really doesn’t help much. I can cite several examples in Taiwan, where such short-term thinking led to very poor short-term results, muddied business plans, and withdrawal from the local market with a sullied reputation.

So I believe that the principle as a business principle is flawed, in many instances. I do recognize instances where it is a valuable ‘rule of thumb’ but it should not be treated as a law or rule in the absolute sense of the word. For the business world, which seems to be focused on the next quarter or next business year, it may seem to be a ‘golden rule’. In reality, it’s likely to prove to be fool’s gold. Unfortunately the 80/20 principle is fast becoming one of the canons of western business principles.

A Man With A Plan: Ways to create additional income

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(ed. Backdated post to January 31st. Written February 2nd.)

Have you read yesterday’s post?

At that time, though, I developed a plan to create a number of streams of income from a number of sources iotending that it become a regular and sizeable amount of income which would allow me to spend time on much profitable and rewarding work rather than just working the typical salt-mine routine that most people follow. Perhaps it was the vulnerability of some kinds of income that made me think that spreading the risk would make it worthwhile to pursue each one.

I decided that if I could, I’d try to create ten sources of income that would leave me less vulnerable to any problems. Of course, it would be great if I could generate income in equal portions and that it would be a steady income. In reality, that turned out to be impossible. Life just doesn’t work that way. The other problem is that it would require a lot of time to complete the plan, but without making a start, I wouldn’t be any closer to the end.

So I set my goal: To generate one month’s salary (in NT$) at about US$1500 from about ten different sources of income as a minimum. I’m going to list the ten different sources (some passive/some active) and identify some of them and how they are doing in relation to my original goal. Currently, I’m approaching a longer term average of about 30% of the total. You’ll see why.

The Ten Sources of Income

The following list of ten sources includes estimates and amounts all in US$ and they are MONTHLY amounts, as well as our own personal feelings about them.

1. Bank Interest: I had a lot of cash saved for my emergency fund stashed away in demand accounts (with interest rates of about 0.4%). So I decided to maximize that return to create the first of ten sources. It still isn’t the biggest, but it is the steadiest. On average it now adds about $25 to my monthly income.

2. Dividend Income: I had read a lot about dividend investing but had up until 2005 looked only at growth stocks and tech stocks (neither of which did well for me). So I switched to dividend paying stocks and have benefited much more than ever. Typically these are generating about $90.

3. Rental Income: My wife and I have talked about renting out our current apartment to generate additional income. But we encountered three problems that have so far prevented us from making any success on this: 1. we like it here and we don’t want to move yet; 2. we still wouldn’t make any residual profit from renting our house out without paying off part of the mortgage principal (something we don’t have enough cash yet to do); and 3. we can’t decide where we’d like to live other than here. Contribution $0. Potential contribution estimated at $100.

4. Private or Part-Time Work: We’ve both thought of switching our current full-time jobs to part-time jobs, working only a few hours a week as tutors. Naturally, we wouldn’t make much gross income but we might enjoy working MUCH more. I had to take an estimate and say both of us would work only 4 hours a week, and we’d earn about $125 per week or about $500 per month from two jobs. Current $0.

5. Online Income: Since I’m a blogger, and I enjoy the experience very much, (as you can hopefull tell) I’d be happy to continue earning money online in a number of ways. My primary blog (this one) earns money from advertising, hosting, and support. While each of these doesn’t add up to much, together and over a year, they do account for about $250 per month. NOW. I’m planning to extend the amount of blogs, services, and options I have so this amount could rise. Potential Income: $300~$30,000.

6. Personal Business: We’ve been business owners for quite a while, and right now we’re also 100% full-time workers in our business (in essence, we’ve bought ourselves a job for the time being). Of course, as owners we occasionally reward ourselves for our hard work and commitment to the business (way and above the regular employees’ schedule!) with owners type benefits. Last year that was a minimal amount: $60 each. This has HUGE potential as passive income source, and we could easily double that amount should we choose. But this remains a potential increase. Right now, it’s pitiful.

7. Consulting: Steve, my good friend from AgentsChat dot com, suggested recently that since my wife and I have been in business nearly 8 years (with varying degrees of success) we might find a ready market for our ‘advice’ or consulting experience: How to Set Up or Manage a Language School. We’d never thought of that as a potential source, but here in Taiwan where people are always looking for an edge, we’d have a market of some unknown potential. Current: $0. This could be a separate business for us, if we had the time.

8. Affiliate Marketing: I’ve not really had much success yet, despite having joined Commission Junction several times. This is unknown potential and depends on my own personal skills. Current $0. Potential $???. We’ve also considered commission sales, but we felt that we didn’t have the skills or motivation to sell Amway products yet. Worse, to do it successfully would need quite a commitment. It might be worth it to see how the entire system works. Current $0. Potential: $0 (until we decide to do it).

9. Lending Money: This is a new option and one for those looking to really diversify their income portfolio. There are many ways to lend: privately (to friends and people you know – loans are made on a personal basis), through agents, and now through organisations like Zopa.com. I’ve currently got a loan extended to a private client that produces about $25.60 per month in residual income. For those of you who can, lending through Zopa or one of the online lending companies (there are several now) could be a good way to add to your portfolio. Unfortunately, due to my residence, this is not something I can do right now.

10. Develop a niche business: GeniusTypes website describes how the author took a lowly business (candy machines) and was able to produce a regular income from the machines he bought with very little additional work. He only had to tend to the machines a few times a month, stock them, repair them when necessary and purchase supplies. It’s well worth reading his post on this. We’ve been looking at ways to make such niche income ourselves, but so far we’ve not really had the time to experiment with this. Contribution $0. Potential $???.

Build your BS detector: Beware the fraud, cons and sinks

There are a huge number of fakers out there: ways that entice people to ‘make money and get rich in three easy steps’. Beware, beware, beware: That’s my advice. You’ll know a deal from a steal (steal your money, that is) easily once you develop your BS detector. I didn’t have one before, but it’s getting more effective now. Here’s what happened to me when I didn’t have one:

At that time, I was just experimenting with income, and I had come across StudioTraffic of which I was a member for a few months before the whole thing came crashing down. For those of you who don’t know, StudioTraffic was a get-paid autosurf type scheme where members would earn money by buying a membership and earning cash by surfing a number of websites on their surf-TV type system daily. It turned out to be a huge waste of time and money for most people, much like Agloco was just recently, because it was a HUGE ponzi scheme.

And the results…

I’ve managed to create a total of about 36% of my initial target. We’ve held back in some areas, not had time to push in other areas, and are unfamiliar with yet others, but with a little more effort, I could start to see results pushing much closer to my own personal target of $1500 from ten diversified sources. In fact, $1500 may be too unambitious. What do you say?

What should you do when you strike it rich? – 7 ways to benefit from windfalls, bonuses, and other ‘found’ money!

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pennys from heavenTonight’s episode of Seinfeld was a rerun from the mid-90s when Jerry receives a large check (so large that Kramer is surprised) for his performance . It’s only part one of a two-parter. But it got me wondering about what most people do when they receive a windfall. Management of your new found resources can be a problem; and it’s a problem that I share with those who get annual bonuses or special rewards, prizes, unexpected windfalls, inheritances, etc..

It’s easy to start planning what you are going to do with the money and quickly you forget how hard it was to come by, or how long you had to wait. In Seinfeld, Jerry decides to go and buy a brand-new Cadillac for his father with the money; he doesn’t even think about other options because he feels ‘rich’. Isn’t it interesting how such income can totally shape your perception of being ‘rich’?

For those of you who have been following my progress this past year, you will have realized that I have begun to accumulate something of a cash position: currently about $7,139.05 worth actually. Of course, this is the gross amount and there have been a number of deductions from the amount for various expenses including taxes, fees, hosting, equipment purchases, etc.. So the total amount isn’t exactly that much. I didn’t keep an exact tracking of the costs either, though from January 1st, I already promised to do that.

To make matters more confusing, some of the earnings are in US$ while others have been paid in the local currency here. And the money resides in several different places as well: my broker accounts, paypal accounts, and several different bank accounts. Rather than splurge on dual 24″ monitors (though I drool), I’ve taken a very much wait-and-see attitude. I’ve been slowly consolidating the money in several places only, and evaluating options for generating additional revenue.

Currently I’m considering five different ways I could spend the money, and I’ll suggest some others that I have already ruled out.

1. Stashing it in the bank: if the amount isn’t large, and the outlook is uncertain (as it is here in Taiwan, with several major elections coming, rising oil/gold prices along with jumping interest rates, it can be quite a good choice to park money in the bank for the short term. The disadvantage is that the money actually loses value as governments tend to devalue currency over the long term via interest rates that don’t keep up with rising prices (and prices are rising F-A-S-T in many parts of the world for many products).

Verdict: For smallish amounts, it’s about the only thing to do other than spend it. I’ve definitely done this.

2. A Term Deposit: A typical bank account pays a pitiful amount of interest: in Taiwan it’s about 1/4% per annum for a standard bank account. This devalues your coin faster than you can say ‘Shinkansen Bullet Train’. Parking it in some fixed term CDs or ‘term deposits’ may be a better choice: rates are approximately 2% (yes, 2%) higher and edging up gradually as inflation is rising. With a choice of fixed rates vs. floating rates, it’s always wise in an rising interest rate environment to choose floating rates to benefit from rises. I noted that today in the bank the fixed rate vs. floating rate term deposits didn’t vary for periods longer than 12 months. Wonder what that means…

Verdict: For largish amounts, it may be worthwhile for longer terms, but don’t park it too long. I’ve also done this.

3. Money market accounts have similar benefits to bank accounts, and indeed, with TDAmeritrade I’ve parked some of the capital in their money market account, which accrues a smallish interest amount every month until the money is enough to do something with. Of course, you need to check WHICH money market account offers the best and most secure deals. (See what a money market account is ).

Verdict: A good way to earn interest payments from your broker, but has its limitations and some risks. I’m doing this right now.

4. Dividend Investing: For a little more risk, though, I’ve been looking at purchasing stocks with Dividends. I’ve always been attracted to these because they are an additional way to earn money from the total stock return ever since my days as a Motley Fool member. Of course, the question of tax efficiency creeps in, it may not be a good choice for everyone. But as part of a general stock portfolio: the triple whammy of capital growth, share re-purchasing, and dividend increases is QUITE attractive. There is the big danger though that you will LOSE money in the short to long term, if you take unforeseen risks or the proverbial s**t hits the fan for the companies in your portfolio.

Verdict: Definitely more potential for earning a profit, but risks are similarly higher. Not for the faint hearted! I’ve done this for quite a long time, with varying degrees of success.

5. Investing in your business: for businesses that are expanding, capital can become scarce at times. Even our business which has been around in various guises for 7 years, sometimes needs capital to furnish expansion. We’ve been lucky as our business really is a light business – it’s service-based – so most of its non-startup capital requirements were funded by its ongoing revenue. But it’s not hard to imagine us needing money for moving to larger premises or purchasing or setting up a branch school in a nearby locale.

Verdict: Much more risk than #5, but the benefits of expanding your profits from your business can be exponential. Of course, the failure rate of new business is high. Done it once or twice.

6. Lending Money: there are a variety of methods now in which small lenders can take on private loans as individuals or syndicates through Zopa (in the UK/US), Prosper, etc.. At the moment, I’m prevented by my residence status from being able to open such accounts, but if I were relocating to either of these countries, this is one avenue I would actively pursue to create additional income. Zopa has tiers of credit markets that would allow you to spread your risk over different types of loans, and perhaps earn interest above that paid by the bank for little extra risk.

Verdict: I’d love to do this, but I’m not legally able to yet. I’ve done lending on Kiva but that’s for a totally different reason. Done it privately both successfully and not .

7. Purchasing websites: There are many quality websites, blogs and forums available on different auction sites including SitePoint and Digital Forums that offer additional options for creating additional streams of revenue. Purchasing an active and reputable website with established revenue streams (from text ads, linking, etc..) could be a risky but exciting way to increase the returns on your investment. I had actively considered purchasing one website BobMeetsWorld when that came up for sale recently. While the actual revenue was under-optimized, it was a PR5 blog that was selling for a good price. Of course, with this active blog already, I’d have been hard pressed to find the time to write challenging content.

Verdict: I’ve considered this, but the risk is considerable. Many auctions are fraught with fraudulent information and listings, esp. as sellers try to justify the higher prices for their websites. It’s even more difficult to verify the reality unless you actually know the website and the website owner. I’ve never done this.

My own decisions: It’s all personal!

I am now preferring to invest whatever money I have to create revenue, whether it is from bank accounts, loans, stocks, websites, etc.. I’m very much concerned that too much of the retail investment market is focused on gains for tomorrow that may or may never appear, and too many employees are invested heavily in stocks, funds, pension schemes that are promising rates of return that are not feasible. So I’m focused on earning income from non-work activities right now so that I will have the skill, knowledge, and income to support a much bigger program of income generation.

In reality, what have I done with the extra income so far? About $2,300 is in a money market account, earning a little interest in my broker’s account. I have been planning to invest this money by buying some Dogs of the Dow stocks to get a better return. And there are some good value stocks that have been beaten down sorely by the current problems in the property market, including Citibank and JPM. The current dogs are Citigroup; Pfizer; General Motors; Altria; Verizon; AT&T; DuPont; JP Morgan Chase; General Electric; and Home Depot .

Some more money is now being turned into a ‘term deposit’ with a term of one year based on a floating rate with current interest rates of about 2.33% for 12 months. Some of the remaining 20% will be kept in a cash position to finance growth and expenses for the website: including finding opportunities to expand my online empire! I’ll let you know how I fare.

Tell me what you did with your bonuses! I haven’t got mine yet… Chinese New Year is coming soonish! Let me know what you did! I’d be delighted to know.