How Price’s Law Applies to Everything

Price’s law predicts how a small number of people in a given group are responsible for most of the results.

Even more interestingly, it looks at how incompetency grows exponentially in large organizations.

Learn about the workings of Price’s law, who came up with it, and how it applies to sales, personal productivity, as well as world history.

What Is Price’s Law?

Price’s law, also known as Price’s square root law, states that of the number of people involved in a project, the square root will be responsible for 50 percent of the results.

Let’s say you have a small business of 9 employees.

According to Price’s law, 3 of them do 50 percent of the work, while the remaining 6 produce the other 50 percent.

Now, let’s look at a mid-sized company of 100 employees.

Here, ten employees do 50 percent of the work, and 90(!) employees are needed for the other 50 percent.

Finally, a big company with 10,000 employees.

Only 100 employees are responsible for 50 percent of the work, while a staggering 9900 are required for the other 50 percent.

Do you see what is going on here?

Things get worse as you grow bigger.

Specifically, the incompetence within your organization grows exponentially, while the competence only grows linearly.

Taking It Further

It is important to understand that Price’s law also applies to Price’s Law.

For example, within the 1 percent who hold most of the world’s wealth, 1 percent again will possess most of the capital.

You can always drill one level further down, as long as there is a group of people left to take the square root from.

How the Rich Keep Getting Richer

There is another implication to Price’s Law, which is sometimes called the Matthew effect.

Once you get to a certain level of success, it gets easier to build on that success.

Vice versa, it is difficult to get out of a bad position. If you are at zero, you are likely to stay at zero.

An example is the movie business. If you have already written several blockbusters, your new movie is more likely to be chosen again by the studio. In comparison, new writers have it much harder, even if their material is better.

The result — the longer a game goes on, the more a few players accumulate most of the shares.

Price’s Law vs. Pareto Principle

Price’s law has been likened to the Pareto principle, which states that 80 percent of your outcome is due to 20 percent of your effort.

For example, 80 percent of your revenue is likely to come from 20 percent of your customers.

The two are similar, but not identical.

Pareto distributions are usually observed in large-scale phenomena — crop yields, investments, software problems, etc.

In contrast, Price’s law focuses on social group settings.

Furthermore, the Pareto principle assumes that the ratio of 80 to 20 remains constant, no matter what sample size you look at.

With Price’s law, the ratio changes, depending on the sample size. The bigger the group, the more incompetence takes over.

Of the two, the Pareto principle is much more widely known, quoted in business books like The ONE Thing by Gary Keller or Essentialism by Greg McKeown.

In recent years, though, Price’s law has gained exposure, mainly through recorded lectures given by former psychology professor Jordan Peterson.

Examples of Price’s Law

Commonly given examples of Price’s law include:

• Wealth distribution. The most recent “Global Wealth Report” by Credit Suisse states that 1.1 percent of the world’s population (56 million people) holds about 46 percent of the world’s total wealth.
• Savings. A small number of people will have 50 percent or more of the total savings in a society, while most people will have very little — if any — savings.
• World news. A fraction of world events makes up the vast majority of the news reported on in the media.
• Number of books sold. A few authors will sell the vast majority of copies (Stephen King, J. K. Rowling, etc.). This can also be seen with music records, movie scripts, paintings, or any other creative product.
• Classical music. Supposedly, 50 percent of the repertoire of classical music was composed by five composers — Bach, Mozart, Beethoven, Brahms, and Tchaikovsky.
• Sports. Most tackles in a football game are executed by the same few defensive players. Likewise, most field goals in a basketball game are scored by the same few offensive players. Same in hockey, soccer, etc.
• Sizes of cities. A few metropolises are home to the majority of humans, while a plethora of smaller cities and villages house the rest.
• Business. About 65 percent of all businesses don’t make it past the ten-year mark, creating relatively little revenue. Of the remaining 35 percent, only a fraction creates most of the total revenue.
• Web traffic. It is estimated that 90 percent of all websites don’t receive any organic traffic, while the remaining 10 percent get it all.

My Personal Experiences

I have seen Price’s law play out time and time again in my own life. Here are just three examples.

Working at a Hospital

Right after high school, I worked at a hospital for a year. What struck me — of the 10 nurses in our ward, only three did most of the work.

The remaining seven nurses seemed to be on a never-ending smoke break. I would estimate it wasn’t even 50 percent of the results they produced, but a meager 30 percent.

Learning BJJ

For many years, I was obsessed with learning Brazilian jiu-jitsu.

The challenge — there are hundreds, if not thousands of different sweeps and submissions to master.

So I kept adding new techniques to my game, assuming that more was better.

Until one day, I realized, that the vast majority of my wins came from the same handful of submissions.

Selling Content Marketing

These days, I run a content marketing agency. We produce keyword-optimized blog articles to drive traffic to our clients’ websites.

Looking at their stats, it’s astonishing how well Price’s law holds up. A few of our articles, about the square root of total articles published, produces 50 percent of the overall traffic.

Who Came up With Price’s Law?

Price’s law is named after Derek John de Solla Price, a British physicist, historian of science, and information scientist.

Price is best known for his work on the Antikythera machine, an ancient Greek planetary computer. He is depicted with a model of this device in the picture above.

But he also conducted quantitative studies. In his book “Little Science, Big Science” (1963), Price observed that about half of the publications in a field will be issued by only a few authors, equal to the square root of all authors involved.

So, if all the literature in a given field was authored by 10,000 researchers, a mere 100 authors would have published half of all papers.

100 x 100 = 10,000.

Price’s law is related to Lotka’s law, a scaling law discovered in 1926 by Alfred J. Lotka.

Price’s Law in Business

Price’s law has several important implications for businesses.

1. Beware of the Death Spiral

When a company struggles, the few high performers will be the first to leave the sinking ship. This happens for two reasons.

First, they are used to taking the initiative. So they will start applying for alternative employment before anyone else does.

Second, they know they are competent and therefore have options. Finding a new job will be a breeze for them.

So, if you are a struggling company of 10,000, once your 100 high performers are gone, you are left with 9900 ineffective employees.

Not only did your productivity just get halved; you are now dealing with a huge overhead of useless staff.

This means once things start to go bad, they will soon get much worse. It’s a death spiral that is very hard to get out of.

But when you are aware of this dynamic, you can try to counteract it. For example, you can identify your high performers in advance. Once the sailing gets rocky, you preemptively pay them a bonus to stay.

2. Pay Attention to Hiring

Another implication of Price’s Law is hiring. Learn to differentiate between A-players and B-players.

You do so by looking at past contributions. Is there any indication that they created asymmetric growth for former employers? If so, hire them on the spot.

This also plays into salary negotiations. Don’t insult A-players by making a low initial offer. Instead, make them a great offer.

It is not about the money. High performers take pride in their craft and invest years in its development. If you see them for what they are, they will feel recognized.

3. Grow Slowly

Everybody wants to grow as fast as possible, especially in the early days of a company.

This is a mistake.

If you are looking for 10 people but can only find 2 qualified candidates, only hire two.

In the long term, this will make your company both more effective and bulletproof.

Strive for quality, ignore quantity.

4. Manage Growth

When you have a small team, everybody knows who the few high achievers are. It’s like living in a small village — everything is out in the open.

With large organizations, that changes.

Here, both the underperformers and the overachievers might go unnoticed for years. This is due to the sheer number of employees, the complexity of the organization, as well as uncaring middle management.

Therefore, as a large business owner, you must take steps to find your few overachievers so you can put them to full use:

• Create a task force. Set aside a person or a team who does nothing else but identify talent. With that extreme level of focus, they are bound to produce results.
• Spot unrest. High performers tend to be harder to work with, as they question the status quo. That will create a swirl of unrest around them. Get in the midst of it.
• Look for ridicule. Creative thinkers get ridiculed initially. Their ideas are so outside the box, the underperformers around them will make fun of them. Be on the lookout for that.

All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.

Arthur Schopenhauer

5. Punish and Reward

Reward innovation. Punish stagnation.

You want to create an environment that caters to high performers, where they receive higher than average rewards. The pay off must be excellent.

Likewise, create an environment that makes it as uncomfortable as possible for underperformers to keep cruising.

For example, you might hand out equity to people who created a highly efficient new process. And you might let people go who haven’t contributed anything in a long time.

Price’s Law in Sales

Price’s law is especially relevant to sales.

Let’s say the sales department of your company has 25 customer representatives.

Of those 25 customer reps, about five — the square root of 25 — close 50 percent of all leads.

The remaining 20 customer reps will bring in the other 50 percent.

Here are a few conclusions to draw from that:

• Pay bonuses. Reward high performers. If you don’t, they will leave. No high performer enjoys being paid the same as lazy Tim playing fantasy football all day.
• Find teachers. Among your high performers, there might be one who cannot only do, but also teach. If you come across such a rare individual, enlist them as an instructor. Have them teach their methods to the less effective sales reps.
• Get recommendations. Capable people know other capable people. Use that. Tap into the contacts of your current high performers to find more high performers.
• Cut costs. Consider letting the ineffective sales reps go. What they cost you might not make up for what they bring in.
• Identify future stars. There are a few future stars hiding among your current underperforms. To identify them, use Price’s law. Calculate which of your underperformers are currently creating 50 percent of the closes within their group. Then build them up through coaching.

Price’s Law And Productivity

You can use Price’s law to increase your personal productivity. Here are three ideas.

1. Bridge the Gap

There is a large gap between the mass of underperformers and the few high performers.

Once you bridge that gap, you will not just see a bit more success, but a tremendous amount.

That’s because ROI, just like effectiveness, increases exponentially.

So do everything in your power to get to the other side. Don’t stop until you have built the skills to cross over.

2. Pick Your Ground

It makes a big difference if you pick a specialization that plays to your strengths.

For example, I enjoy coaching people. But I loathe accounting.

Could I become a good accountant if I applied myself? Maybe. But it would take much longer, and I would probably never become a great accountant.

Therefore, invest your energy in an area that comes relatively easy to you. Make that your key differentiator.

3. Choose the Right Habits

Not all habits are created equally.

Doing 100 air squats a day will have much more of a positive impact on your fitness than taking a supplement.

Likewise, cold calling three potential new clients will lead to better finances than couponing.

Focus on habits that provide the greatest ROI. Ignore habits that accomplish very little.

Is Price’s Law Accurate?

From my personal experience, yes.

However, there is no proof of Price’s Law in terms of a large-scale study, at least not that I know of.

In any case, the law has to be taken with a grain of a salt, as it measures output purely quantitatively.

One scientist might publish 10 papers in 1 year, but with very little impact on the field.

Another scientist might publish 1 paper in 10 years and completely revolutionize the field.

So it’s important to keep the quality-over-quantity criteria in mind when you consider Price’s law.

Is It Fair?

Price’s law is often criticized in terms of wealth distribution. Some people argue that capital should be redistributed to make things fairer for everybody.

That is a case of wishful thinking.

The injustice is not built into the system — it is inbuilt into you and me.

If you are more competent, charismatic and driven than me, you will rise to the top.

It simply cannot be helped. Just like gravity, the economical law persists. You can’t change people.

The only solution is to change yourself. Become as competent, charismatic and driven as you possibly can.

You must join the square-root.

The Rise and Fall of Empires

Price’s law gives mathematical credence to a cyclical view of history, as proposed by thinkers like Giambattista Vico, Oswald Spengler, and Arnold Joseph Toynbee.

Here, history is a series of rising and declining empires, like a plant blossoming and dying. This contradicts the linear view of history, where progress is never-ending.

In the cyclical view, each empire has an energetic early phase, a productive peak phase, and a decadent late phase.

Let’s look at these phases in turn.

1. The Early Stage

Any organization — be it a business or an empire — starts small. In the beginning, according to Price’s law, competency and incompetency have a somewhat favorable ratio. In some outliers, competency is slightly higher than normal.

These organizations keep growing faster than their competitors. If it’s a business, it starts to dominate a market. Then it starts buying its competitors; first in its own market, then in outside markets.

Likewise, with empires. They start adding on other nations, either through military conquest or through economical dependencies. The early Roman Empire expanding beyond the Italian peninsula is the classic example. European colonialism is the most recent one.

2. The Peak Phase

Eventually, the aforementioned businesses consolidate themselves as omnipresent economical powerhouses. Think the House of Medici during the Renaissance, or Alphabet Inc. (Google) today. Innovation begets innovation, profits keep skyrocketing. No one can compete with these behemoths.

It happens similarly with nations. At it’s peak, the Roman Empire, due to competent leaders and an effective military, covered vast stretches of Europe, the Middle East, and Northern Africa. Rome was everywhere.

With it came Roman roads, aqueducts, and architecture. Hygiene and life expectancy were high. So was the level of public safety and education. The arts flourished.

During this peak phase, success seems never-ending. Because of constant growth, more and more output is generated. At the same time, competency and incompetency have not grown so far apart yet as to threaten the very existence of the organization.

3. The Decadent Phase

But once past the sweet spot, inevitably, every successful organization enters into a downward spiral. Paul Kennedy coined this the “imperial overstretch.”

At this point, because of its exponential function, incompetency has grown rampant. It now completely negates competency within the organization, which had only kept growing linearly.

This is when businesses fall apart. A vast number of employees is hardly doing any work. Incompetent managers make bad decisions. Nobody cares. Subsequently, the talent leaves and the house of cards collapses.

This can be seen during the decadent phase of a civilization. It becomes tired of itself. Procreation stops, the populace shrinks. Art now serves as mass entertainment. Religion yields to secularization.

Eventually, such a late civilization starts to revert to its early days, with people leaving the big cities and becoming provincial again. But it’s just a distant echo of the original thing; all vitality is gone.

It’s Inevitable

We all cling to the illusion that this will never happen to us — the business we work in, the Western society we live in.

But the evidence is clear.

In businesses, the average S&P 500 company has a life expectancy of 18 years. 75 percent of the S&P 500 will be replaced by 2027. Companies like Pan Am, Commodore, or Enron clearly illustrate this point.

Likewise, numerous empires have come and gone. Ancient Egypt, the Babylonian Empire, Imperial China, the Romans, the Aztecs — they all thought themselves invincible.

Where are they now?

In every expanding organization, there comes a moment when competency is buried by incompetency. Railing against it is as pointless as railing against the weather.

Price’s law is truly a law.

We learn from experience that men never learn anything from experience.

George Bernard Shaw

Don’t Despair

I realize all of this sounds very fatalistic, but it is not.

First, every ending means a new beginning. After one cycle ends, another one starts.

Second, the late phase of every large organization has its own, decadent beauty. This, too, can be enjoyed, like a walk on a fall day.

Third, and most importantly, we should never chain ourselves to the fortune of a group. The only antidote to Price’s law is the individual.

The square root of one is one.

When you rely on yourself, competence and incompetence do not follow linear and exponential growth, respectively. They develop according to how you choose to invest in yourself.

We might be slaves to the time we are born in — but as individuals, we are free to conduct our lives as we see fit.

There is only one corner of the universe you can be certain of improving, and that’s your own self.

Aldous Huxley