This blog post inspired my post here.
A fascinating phenomena occurs in both human society and in the natural world: a small percentage of sports franchises / businesses / species end up with a vast majority of the success. Why is this?
First, let’s look at some examples in human society as well as the natural world:
- 1.4% of tree species account for 50% of the trees in the Amazon
- Just two franchises have won almost half of all the championships in NBA history.
- Google receives 64% of all search queries
- 77 nations compete in the world cup, but 3 countries have won 13 of 20 World Cup Tournaments
What drives this? Why aren’t things more evenly distributed?
Two major principles drive the uneven distributions we see in the world:
- Winner take all effect: a new startup business with only 1% more customers and 1% faster growth than a competitor might receive the entire three million dollar investment from a venture capitalist. The competitor gets nothing. As time goes on, that first business keeps gaining more and more advantages until it’s lead is enormous and it has orders of magnitude more customers than the competitor that originally was only slightly smaller.
- Accumulative Advantage / Power of Compounding Interest: If two marketing firms are competing with one another, and one retains 99% of it’s clients each month, while the other retains 98% of it’s clients each month, at the end of 11 months the firm with 99% retention will have 90 clients while the firm with 98% retention will only have 80 clients. Stretched over four years, the firm with 99% retention will have 62 clients while the firm with 98% retention will only have 38 clients.