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According to the U.S. Bureau of Labor Statistics, “Productivity is a measure of economic performance that compares the amount of goods and services produced (the output) against the inputs used to produce those goods and services.” That is important because productivity is the driving force of all organizations, whether for profit, non-profit or government. Productivity is king. So, understanding what impacts productivity is vital to anyone running a department, division, company or other concern looking to harness resources in order to achieve results. For a business owner trying to generate a better bottom line by increasing efficiency and effectiveness, it is vital to have a keen understanding of forces impacting productivity.
For those focused on productivity, it is important to know Price’s Law. Price’s Square Root Law, often referred to just as Price’s Law, states – at its core – that in any productive community, 50% of the results will be achieved by the square root of the total group. The “Price” in Price’s Law has nothing to do with pricing. It is named after the person who pioneered the concept, Dr. Derek John de Solla Price.
A British physicist, historian of science, and information scientist, and former professor of physics at Yale University, Derek John de Solla Price was looking at scientific information and observed that among his peers there were always a handful of scientists / subject matter experts who dominated the publications within a subject. Specifically, half of the published articles / publications came from the square root of all contributors to those publications. For example, if 100 scientific papers were written by 25 authors, five of those authors (5 is the square root of 25 authors total) would have contributed 50 papers (half of the total papers).
Square Root of Total Contributors (workers √2) = 50% of all Published Articles (work product)
While it’s an interesting observation, what does this have to do with productivity in business? It turns out that Price found this phenomenon didn’t just apply to scientific papers and scientists. It applied to productivity in general. Basically, of the number of people involved in a project, the square root will be responsible for 50% (half) of the results, regardless of setting or situation.
Price’s Law at Work
How would this theory apply to business? Let’s look at some examples of how this theory might manifest in business. Say, for instance, there is a small manufacturing business that has 16 employees. Price’s Law says 4 (√2 of 16) of the employees do half of the work while the remaining 12 do the other half of the work. If the business manufactures 2 Million pens that generates $500,000 in revenue, then 4 employees generate $250K of that revenue while the other 12 generate what amounts to the other $250K of revenue.
Applied to a mid-sized organization, it is more dramatic. For example, if a Software-as-a-Service firm employs 225 salespeople, Price’s Law says that about 15 of the salespeople who work there generate 50% of the sales for the firm. If the firm is generating $10MM in sales, then 15 people are generating $5MM in sales, while the other 210 people at generate the other $5MM in sales.
When applied to big organizations, the discrepancy would be even greater. A company with 8,000 employees and $100MM in sales would have about 90 employees generating the work that results in $50MM in sales while a whopping 7,900+ employees generated the other $50MM in revenue.
Price’s Law has been observed in many settings and it happens unintentionally. It just works out that way. What Price’s Law argues is that productivity gap between those who produce and those who don’t gets bigger as the group grows. It implies that lack of productivity within an organization (by the many) grows exponentially while productivity in the organization (by the few) grows in a linear manner.
Is Price’s Law true?
Price’s law is an idea or theory and not a scientific fact. Like Pareto’s Principle, Price’s Law is more a rule of thumb that is widely observed. But, it is not a perfect algorithm that works in all cases. That said, as a frequently observed phenomena, the underlying concept of Price’s Law is that a small fraction of a team will do most of the work if left to its own devices. While there is no rule of nature binding people to this ratio, it is what tends to happen when teams aren’t optimized and productivity is not monitored or measured.
The reason Price’s Law is a theory that is taken as law is because it has been confirmed in a variety of situations. For example, the most recent “Global Wealth Report” by Credit Suisse indicates that just over 1% of the world’s population, roughly 56 million people, possess an estimated 46% of the world’s total wealth. And as to where that population lives, a small number of major cities are home to over 50% of humanity while the rest of the people worldwide are housed in small towns and villages throughout the rest of the planet. In terms of business, of all new businesses, 65% don’t survive 10 years. Of the remaining 35%, only a small percentage generate more than half of all revenue generated.
Price’s Law also applies to other forms of productivity. In world news, a small fraction of the total number of world events make up the vast majority of the news reported on in the media. In the world of book publishing, a very small fraction of all authors (like Stephen King, JK Rowling, Dan Brown, James Patterson, Suzanne Collins, John Grisham, etc.) sell the vast majority of copies of books sold. This is also seen with music records, movie scripts, paintings, or any other creative product, and not just recently. In the world of classical music, 50% of the most performed classical music of all time was composed by just five composers: Bach, Mozart, Beethoven, Brahms, and Tchaikovsky.
Even in sports, Price’s Law applies. Most tackles in a football game are executed by the same few defensive players, and in basketball, most points scored by the same few players. This is also true in hockey, soccer, and other sports. In the current World Cup, of the 55 players, nine have scored the most goals including 3 points by Kylian Mbappe and Enner Valencia, and 2 points by Lionel Messi, Bukayo Saka, Ferran Torres, Mehdi Taremi, Olivier Giroud, Richarlison, and Cody Gakpo.
Price’s Law also holds true for podcasts. There are 383.7 million podcast listeners globally, and it’s forecast that there will be around 424 million podcast listeners worldwide by year end. And, as of June 2022, there were over 2.4 million podcasts with over 66 million episodes between them. However, of the 78% of the Americans who are aware of podcasts, only 28% of them listen to podcasts weekly. And of the podcasts that exist, only 1% get on average 3,994 downloads in the first week while 50% of all podcasts get less than 30 downloads in the first week. Podcasts that don’t get many downloads in the beginning usually fizzle and die. So the vast majority of podcasts end up with very few downloads even though there are hundreds of millions of listeners. That is Price’s Law at work: in any productive community, 50% of the results will be achieved by the square root of the total group.
Price’s Law vs. Pareto’s Principle
Price’s law has been thought to be related to the Pareto Principle, which states 80% of an outcome is due to 20% of the effort. For instance, 80% of a company’s revenue is generated from 20% of its customers. Or 80% of an organization’s work product is produced by 20% of its team members. The two concepts seem to have some similarities, but it’s not identical.
Under the Pareto theory, distributions tend to be connected to large-scale situations such as investments, crop yields, inventory management, finance and project planning, etc. Price’s Law, however, is focused on social group settings such as with employees in a business.
Moreover, the Pareto Principle assumes the 80:20 ratio remains constant, no matter the size of the group. But with Price’s Law, the ratio changes based on the size of the group. The bigger the group, the greater the discrepancy or gap.
So how does a department, division, company or organization deal with Price’s Law? If a small few are carrying the weight of the whole, what can be done to fix that? What’s the solution? Tune in next week as we look at overcoming Price’s Law.
Quote of the Week
“If you want something done, give it to a busy man.” Preston Sturges
© 2022, Keren Peters-Atkinson. All rights reserved.
