the 80/20 rule -- watch out for the 20 (or 10, or 5)

This posting in the Chris on Engineering blog explains better than I've seen elsewhere the application of the 80/20 rule.

Today, Daniel Smith and I discussed a potential advertiser for our publications. The new business wishes to promote an Internet-related service. Its owners had spent significant money exhibiting at a renovations show, and received no satisfactory results. The enterprise, operated part-time, has a budget of $2,000 for business development. Daniel, working with them to find a way to help them generate business, suggested some ideas on how they could improve their approach. He then asked me for advice on how we could help out.

Alas, in this case, I turned into a rather blunt boss, telling him to decline their business. This is after we spent about 10 minutes discussing the enterprise. Neither of us could figure out how the business would realistically earn a profit. I told Daniel I wasn't interested in doing a half-size (that is 50 per cent below our minimum volume) advertorial feature for them because it probably wouldn't work, and we would spend more time serving them than we could possibly hope to achieve in useful business. In any case, I couldn't ethically encourage a situation where we would drain almost half of their marketing budget on a single advertorial story.

I have some grey hairs, having survived (and sometimes thrived) in business for 20 years. At the very beginning, I drew up a plan that just didn't add up as a rational business, but I listened to my heart and gut feelings, and proceeded. But I also set a condition: I would only launch the business if I could do it with absolutely no money.

With some creative interpretation of the Unemployment Insurance legislation, my former employer assisted me with a planned layoff (I realize this isn't quite 'right' but two decades have passed, and now the government actually has a program that allows budding entrepreneurs to collect unemployment benefits while launching their business), so I had some income support, but how could I pay the bills of my fledgling publishing enterprise?

I decided to see if I could collect the money from advertisers before publishing, without a prototype, just an idea. To help make the offer appealing, I set up the Net and Gross pricing system -- offering a 25 per cent discount for prepayment. (We continue the system, but now provide the discount if advertisers settle their account quickly after publication).

I succeeded. Several clients liked the idea, and were willing to hand me a cheque on the spot. I sold a few thousand dollars worth of advertising, enough to produce certified cheques for the design house and printer. And I was in business.

You can compare my start-up approach to the Internet start-up business with no revenue, and no proven market. "Woah!", I say. If you wish to start a business without a track record, you've got to preserve your capital -- and make sure that customers will pay before you go too far.

We simply cannot ethically take their money because I can't see how we can generate the kind of fast and immediate returns they need to survive. The entrepreneurs should not be talking with one of my advertising representatives: They should be on the phone, meeting people, and getting people to pay for their idea, not spending money on wishful dreams.

Meanwhile, we should use our time more wisely and work with potential clients who can pay and will benefit from our services.

I pointed out to Daniel how, just before discussing this matter, we had reviewed our progress in seeking business relating to a $500 million project. While we had spent about 15 minutes on the Internet pipe-dream, we had spent just a minute figuring our strategy to find business where there is real money and valid opportunity. Here, more clearly than ever, the 80/20 principle applies -- spend just a little more time and effort on the things that produce results, and cut just a little from the things that don't (20 per cent each side) and you'll gain far more than you spend.