The Problem With Price's Law

Managing a small business is hard enough, but scaling it exponentially into a much larger company introduces some unique challenges. One of these is Price's Law.

Derek Price was an applied mathematician who discovered that half of the academic publications on a particular subject are produced by the square root of all contributing academics. For example, if 100 authors collectively publish 500 papers, then 10 of them will be responsible for half of the work.

Price's Law is not limited to academic research. In any field of production, a small handful of people will do most of the work. This has very important implications for entrepreneurs with big ambitions.

Imagine you're running a business with 10 employees and an annual turnover of R10m. According to Price's Law, 3 of your employees will be responsible for half of the work. You obviously wouldn't want to lose those top performers because they're so valuable to your business. Fortunately, it shouldn't be too hard to figure out who they are since your total workforce is quite small.

But what happens if you 1000x your business?

Now you have 10 000 employees and an annual turnover of R10b. However, Price's Law still holds true, which means that only 100 employees will be doing half the work. Retaining those elite performers is more important than ever, but identifying them will be much harder because your total workforce has ballooned.

So as your business grows, you'll add more replaceable employees but fewer top performers. Your ability to differentiate between the two will be critical to your success.

In other words, productivity scales linearly but mediocrity scales exponentially.