Power Law in Business
The general definition of a power law is: a distribution where a small number of items is clustered at the top or bottom of a distribution, taking up to 95% of the resources. In a normal distribution, the distribution it the highest at the middle, and then goes in both sides in the form of an almost symmetrical bell curve. In contrast, the power law distribution is extremely one sided. Please check both graphs below to better understand.
Some examples of the power law distribution:
- Distribution of income, the 1% make up to 95% of the global income.
- Size of cities according to population, less than 1% of cities hold up to 95% of the population.
- Size of corporations, less than 1% of corporations have up to 95% of the total value of corporations.
- Trading volumes on the stock market, less than 1% of the stocks get up to 95% of trading volume.
Power Law in Business
Revenue: sometimes the revenue of a business comes almost entirely from one product or service.
Leads and marketing: often in marketing, one channel brings the vast majority of business.
Startup funding: also follows a power law, the 1% of startups get more than 95% of the funding. Also, the 1% of the startup investments get more than 95% of the ROI.
Negatively, also sometimes 1 product requires 90% of the support.
Related:
We Don’t Live In A Normal World; We Live Under A Power Law – Peter Thiel
The 80 / 20 Rule
