Pareto/Power Law distributions: the needle in the haystack

I wrote previously about the prevalence of Pareto/Power Law distributions in product users’ behavior here.  Wow, that’s a lot of alliteration.

But the discussion stopped at only one dimension of data.  For example, a single dimension like Free versus Paid users of a Freemium product such as online backup.

The story gets really interesting when you consider multiple dimensions (aka variables) of data at once, each with its own Pareto characteristics.  The outcome can lead you to a some very interesting places.

In the first scenario, a small set of users in Dimension One (let’s say, Paid product users) also represents a small set of users in Dimension Two (let’s say, country of user origin).  This can mean that a tiny percentage (sometimes less than 1 percent!) of an entire user base represents almost all of the revenue or commercial value.

When this happens, it’s incredibly important to know who these users are; you’ll need to hang onto them for dear life to protect your revenue stream.  For example, you might cater to the specific needs of users from their country of origin.  Do you think users in China have different product needs than in France?  Probably.

In this scenario, you’ll also need to consider a revenue diversification strategy to protect your risks of relying on such a small segment.

Another scenario is that users in Dimension One (again, Paid users) don’t belong to the majority (or, “head”) of the distribution within Dimension Two (again, country of origin).  In which case, the implication is that country doesn’t matter in targeting your best (e.g. paying) users.

You can go astray in this scenario by looking at country of origin in isolation.  Maybe you have a huge pool of users from Germany.  The temptation would be to conclude “Germany is my most important market”.  Unless you knew that paid users didn’t cluster around a single country and that Germany was comprised of lots of free users.

What to conclude?

One: make sure you know if your most valuable user segment is much smaller than a Normal distribution would imply.  Most people think that their most important user segment is something like 10-20% of their base.  If 1% of your users drive the business, know who they are, find more like them, and don’t lose them.

Two: don’t let any one dimension of data drive your definition of user segments and internal decision-making.  If you hear sound bites inside your company like “German users are our most important”, that’s being too imprecise.  It generally takes 2-4 dimensions/variables to be precise about a user segment and to know how to best treat them (“Paid users with broadband PC connections in Germany are most important”).

Three: if you truly have 1% of your users driving the business, consider diversification strategies.  You’re carrying a lot of risk, but you also have 99% of your users from which another valuable segment can be found and served.

Last: as I argued in the prior post, it’s easy to dismiss the Pareto effect as only applying to obvious examples like Freemium for online consumers.  I’ve found the same patterns in other businesses.  In which case the gap between reality and perception is even wider!  Spend some time hunting down these patterns inside your company.  I promise you will be rewarded with new insights.

Our brains are wired somehow to think of everything in terms of a Normal Distribution, aka the “Bell Curve”.  It’s a trap that can kill a tech company.

The shape of the curve means that we think of populations of data (such as users) as being a somewhat homogeneous group if only we could compute the average.  For example, how many minutes per day “on average” a user spends on a website.   Or, the percentage of people “on average” who actively post on a social media platform.

The problem is that populations of people almost never behave in a normal distribution when online or using software products. Instead, the more prevalent pattern of behavior is a Power Law, or Pareto Distribution:

The Pareto distribution is also known as the “80/20 rule”.  Except that in online worlds, the ratio can be even closer to “95/5″.

Think of Freemium business models.  Generally, 2-8% of users consume a paid offering.  The rest use the free version.  Power Law/Pareto distribution, not Normal.

Think of participation in social media.  1% are active contributors, 10% are intermittent contributors and 90% consume but never post.  Power Law/Pareto distribution, not Normal.

These steep Pareto curves have profound meaning on making choices in running a technology company.

If you operate a Freemium business but don’t know which users are the 5% most likely to upgrade to the paid version, then you risk catering to the needs of the Bell Curve: a population of users that looks more like 50-60% of the whole.  Who don’t necessarily pay or monetize.

This is the trap. Chris Anderson touched on this in his book “Free”, by illustrating how the Power Law distribution drives monetization in Freemium business models.

There are other traps by thinking in Normal terms.  Beyond Freemium, the Power Law distribution of behavior still applies.

Take Enterprise business models.  Every user is a payor, of approximately the same fee.  Yet 2-10% of a user population is massively active versus the rest.   And with that 10% of users comes maybe 10-20% of the revenue.

Which is your most important segment? Are you trying to solve the problems of those 10% “power users”?  Or the needs of the rest?

An example: I managed a product that enabled monitoring of corporate networks and systems for the sake of spotting anomalies.  Anomalies which could indicate a security breach in progress, or the risk of one.

Some users spent a large percentage of their day performing the monitoring function for the company.  They were specialists who used the product intensively throughout the day.  These power users had distinct needs, such as the ability to mine and explore data in depth to spot anomalies for themselves.

The rest of the users were different.  They weren’t monitoring specialists.  The monitoring role was only one of many roles they played for their companies.  Thus, they wanted to spent the least amount of time possible in my product.  Instead, they expected the system to alert them automatically, and offer specific actions to take.

Two user populations.  Two very different sets of needs.   One “market”.

Knowing who your core audience is, and the nature of the Power Law distributions, is essential in setting priorities on which segments to serve.  And those that can trap you.

In this post, I’ve only been discussing Power Law in one dimension of meaning (free vs. paid, automated alerting vs. manual trend-spotting).  Some of the most interesting Big Data analytics findings come from combining multiple dimensions of meaning, each with its respective Power Law behavior (a simple example: free/paid combined with locale).  I’ll tackle that one in a future post….

I deliberated writing this post for the risk of being seen as, ahem, “patrician”.  But I have been moved by some young women to do it anyway.

Recently I hired a woman who just graduated from her Master’s program in business & marketing. During the interview process, she distinguished herself as having great potential. And everything that she has done since arriving has reinforced my impressions.

I began to reflect on where her talent might take her in the Czech workplace in the years ahead. As I looked around at the women in my company, and other companies I have been exposed to in the Czech Republic, I saw the dearth of women as managers. And there are still fewer female executives. Most women are individual contributors and many of those are performing administrative assistant functions.

Americans decry the lack of women in high positions, but the situation is worse still in Czech.

This is a country that is growing in large part thanks to its “knowledge economy”, where the technology and business process outsourcing sectors are the engine. What a shame if a big part of the workforce is excluded from participating in that opportunity.

As an American, one must be careful not to judge other cultures that one doesn’t fully understand. Perhaps women drop out of the workforce once they have a family due to choice of priorities. Or is it because they have no incentive to remain in the workforce?

But for those women who do want a career, it’s going to be a long hard slog. What to do?

First, the challenge will be greatest for women who have been in the workplace for 15 or more years. They are now labeled by the role they currently play and the money they now earn. If they haven’t succeeded in defying the odds somehow and become high earners, managers and executives, then the system won’t change in time to remove the obstacles for them.

Second, for those in the workplace for 5-15 years, the non-managerial roles are probably within easier reach. There can be a career growth path that rewards expertise as an individual contributor and avoids the strongest bias, which is against placing women in leadership roles. Maybe the government should step in and provide mid-career assistance in training and education that enables individual contributors to ascend to a level of expert? Certainly, technical disciplines like high-tech and manufacturing can support such a career ladder.

Third, the youngest of the workforce stand the greatest chance of unconstrained growth. There are tremendously smart, ambitious women available as recent graduates. And the wages they command are modest to say the least. Can they be fast-tracked somehow? Such as pairing them up in apprenticeship-style roles doing the work of a more senior person or even a manager? Companies can afford to carry these costs if they see the value in finding early stars and grooming them.

Last, time above all will enable change. The issue of women in the workplace is a global one, and no country stands out as having solved it. However, the Czech economy is increasingly global; with it comes exposure to other business cultures where women play a more prominent role.

I suppose the greater question is whether Czech society wants this change for itself.  I certainly hope so.  I’ve seen the bright young faces and the hope they have for their careers. They deserve the chance.

This morning, I woke up and started making coffee.  As I do every morning, I placed a paper towel on the counter to catch my coffee spills.  Except this morning, the paper towel caught my eye:

The similarities are striking, no?  I mean, Hadoop is popular and all, but I didn’t realize it is now marketed to Tesco customers in Prague via paper towels. 

His email was prompted by his New Year’s resolution to write old friends, and tell them what that friendship meant to him.  So I was a pleasantly surprised recipient of one.

The cynics amongst us might think it’s a mid-life crisis on his part, or some sort of self-improvement technique as taught in a self-help book.  I don’t really care why he wrote me; the sincerity was what mattered.

I was struck by two things.  First, the stories he told about a friendship 20 years ago had been long-forgotten by me but came back in vivid terms once reminded.  It was if, by being reminded, that these stories happened yesterday.

Second, it was fascinating to read what he remembered and valued.  Like interests I might have shared with him that I would never have imagined to be meaningful.

So I wrote him a reply.  It was easy to remember things that his friendship gave me in turn.  Things that were unique to him such as the fact that he is a native of New Orleans and introduced me to that city as an insider.  My love affair with New Orleans has endured ever since.

I was also reminded of the fact that my family and I probably won’t live in Prague forever.  Nor will our ex-pat friends.  It’s the nature of being an ex-pat that friendships are somehow temporal.  But they are still enduring in a way.

We all have friendships that have faded over time and place.  Perhaps most of our friends in early adulthood are no longer active.  But did they really die?  Not if the memory can be conjured, and one can describe how that person played a role in helping you become who you are.

Reading Mike Driscoll’s recent blog on software craftspeople reminded me that this architecture topic has been stewing in my brain for a while now.  Time to write about it.

“Too hard”, “too complex”, “too long” are the persistent reasons behind engineers’ resistance to feature requests or major product pivots.  What I realized is that in every case, it was the software architecture holding us back.  More specifically, the lack of componentization and modularity.

And the pattern spans every experience I’ve had; across lots of different products, across lots of different market sectors, across lots of different architectures (from client-side tools to client/server apps to SaaS/cloud apps), and across lots of different company sizes (pre-revenue to behemoths like SAP and EMC).

Need a new UI presentation tier?  Sorry, that code is co-mingled with the underlying business logic.  Need a new data management tier?  Sorry, the file system is bound to the rest of the code.  Need new business objects to show up in the schema?  Sorry, we can’t split our giant table and it’s already too big to extend.

One can understand how this predicament arose.  When new products are built, what’s required is focus on solving the user problem at hand.  You don’t have time nor money to design for unknown needs and future flexibility.  So why pay for abstraction and modularity without any present-day reason?

The bigger problem is when products mature and the user needs outgrow or diverge from the capabilities of the original architecture.  What to do next?  Re-factor and modularize?  Re-build from scratch?  Limp along by stuffing new features into the code but with huge effort each time?

Nobody knows the magic formula for how to make these decisions.  Re-factoring scares the crap out of engineers lest they “break something”.  After all, by the time this discussion arises, you’ve got spaghetti for code.  And the folks who wrote it might not be around anymore.

Re-write scares the crap out of the business leaders, since it appears to be paying twice for the same product.  And there’s the inherent risk of missing deadlines.  Oh yeah, and you just put your legacy product version on life support so you can afford to staff the engineers on the re-write project.  And you’re losing ground to competitors along the way, since you’ve stopped new feature development to pay for a better architecture.

No wonder products whose architecture devolved to something bad, or started that way, never get fixed.

This vicious cycle is what creates the opportunity for “innovation” in the form of a start-up who has the benefit of a clean sheet of paper: fresh, elegant code using state-of-the art languages, components and tools.  That seems like a wasteful way to solve the problem.

Enter the architect.  If you have a great architect, every problem is reduced in magnitude.

With a great architect, new products have some modularity and flexibility designed in.  A little bit of future-proofing goes a long way. Existing products can be selectively modularized and modernized so the new functional capabilities are delivered without breakage.  And if the time comes for a re-write, you have confidence that all of the lessons learned from the legacy code base are applied to the new design.  Thus, a greater chance of success, especially in meeting a deadline.

So, what makes a great architect?  In many respects, a lot of the same characteristics that make a great product manager: curiosity, an ability to translate what users and salespeople need into technical terms, abstract thinking that enables one to imagine new possibilities, etc.  Of course, the architect also needs the deep technical experience too.

Back to the premise of Mike Driscoll’s article: the best software is being built by people with, dare I say it, experience.  Experience to avoid pitfalls because she messed something up before.  Experience to choose the right tools for the job, much like a fine craftsman that builds furniture, or houses, or bespoke clothing. Experience to know what degree of flexibility to design in, without paying for needless flexibility that feels more like insurance against every conceivable future requirement.

I’ve known some good architects and probably only one or two great ones.  With the great ones, we have had some huge debates thanks to the force of personality that seems to come with great ones.  But in the end, despite the strong personalities, great architects are worth having.  And the great product companies know this, which is why they spend a lot of money on great architects.

I say it’s money well spent.

I’m proud of those who have played such a big role in building the company to this point.  And I’m proud to have played a small role too.

Time to sit back and watch the ticker with fingers crossed.

Coincidentally, a couple weeks ago a long-time friend sent an email to numerous people in response to President Obama’s State of the Union address.  I don’t recall ever getting an unsolicited email from him about politics in the 15 years I’ve known him.  But it certainly was a rant.

Consider the emotions in some of the words and phrases from his email:

• “A brutally complex issue reduced to a nonsense issue”
• “I want to barf”
• “…it is the duty of everyone to work for his defeat in November”
• “A 2nd Obama term, totally untethered from public opinion will be a total disaster.  I hope all of you can take some role in ensuring his defeat in November”

Which drew the following response from someone else:

• “If we are now outnumbered by liberals, democrats with limited brain functionality, union workers, the uneducated, and young voters, then the chances are very real that the current “President” could win a second term”
• “And if that happens, then the chances are very real for a second American Revolution – this time against our own Congress, which has nearly completely caved in and lost its backbone”
• “If we do win, however, I believe we need to somehow change our system permanently so that Congress DOES WHAT WE SAY TO DO and nothing else, or we will vigorously prosecute them and send them to prison”
• “I fear the continued existence of the USA is in doubt if we don’t! One answer is to decentralize our Federal government and send our representatives and senators back to the states, where they are closer to home and we can watch them more closely. Please think hard about this”

Subjectively, it seems like a pattern.  Something has changed for these persons, and probably not for the better. Is it the stagnation of real income growth in the middle class?  The unrelenting pace of change driven by globalization and the strains of keeping pace?  I won’t speculate other than to say that these are very strong emotions, which begs the question why?

It’s now the “quiet period” according to our friends at the regulators, so I won’t comment beyond that.

The backlash to this announcement was pretty huge.  To the point that Netflix had to “undo” the announcement.  Talk about a black eye.

The timing of the decision is certainly up for debate given how customers reacted.  So let’s say it was premature.  But how premature?

I still contend this is the right decision.  Eventually.  Just like the Pony Express was rendered obsolete by the telegraph, so too will mail-order media delivery be made obsolete by streaming delivery.  Who would believe otherwise?

It’s darned hard to time such changes, however.  Most companies never make the leap at all, hence books like The Innovator’s Dilemma.  For those who have the bravery to do so like Netflix, the timing is a perilous choice.  Too soon?  Investors punish you for cannibalizing current revenue and alienating happy, paying customers.  Too late?  You’ll probably never catch up.

If I knew the answer, I’d be a rich man.  My sense is that it’s impossible to make a formula.  Instead, it’s about getting the whole set of stakeholders on the same page.  So when it’s time to jump off the cliff, everyone is holding hands.  CEO, executive team, Board of Directors, large investors.  Not a small task.  At least you’re trying, Reed.