Perry Marshall's Espresso Machine Principle

[terrordread]

I recently read Perry Marshall's book 'Detox, Declutter, Dominate: How to Excel by Elimination' and thought it was pretty good. In short, it's about focussing your time and energy on the small percentage of things you do that yield the highest return. It's very short and takes about an hour to read.

In the book, Marshall outlines the principle of having an espresso machine in your business. He says that for every 1000 customers that go into Starbucks and spend $5 on a coffee, 1 will scratch their coffee itch by buying a really expensive espresso machine. He arrives at this by applying the 80/20 rule which states that 80% of your profits come from 20% of your customers.

So if 1000 people come in for a $5 coffee, 20% of them will spend 4x more than the other 80%, meaning 200 will spend $20 each. Of those 200 people, 20% are willing to spend 4x more than the other 80%. That results in you having 40 people coming in and spending $80 each. Within this group of 80, there will be a further 20% who will spend 4x more than those other 80% - 8 people at $320 a pop. Of those 8 people, 20% are willing to spend 4x more which now leads to 1.6 (but round it down) will spend 4x320 on a product in your shop if they think it's valuable enough. So of 1000 people, 1 person will spend $1280 with you if you give them the chance.

It's worth noting that in the book he also says you can't sell a $5 cup of coffee for $1280, but as long as the product is perceived as distinct enough from the coffee and offers what the customer deems as a good deal, you will make the sale. There's a link at the bottom of this post to him giving a talk on this idea if you want it straight from the horse's mouth.

Here's the thing though, I'm not sure that this principle is actually true.

I ran a bar business for 3 years and very much doubt that 1 of every 1000 customers I had would have been willing to spend 256 times more than their peers at my bar.

What do you think? Does anybody have insight into this they're willing to share? I'd love to be proven wrong or have my mind changed.

View: https://www.youtube.com/watch?v=BXTaiq2Dh4s

 

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[MTF]

He also calls it the 80/20 curve and talks about it in his book 80/20 Sales and Marketing. He also has an online tool to calculate that: 80/20 Curve

 

[WestCoast]

This seems like a really complicated way to think about business.

Did this guy make up a 'clever sounding business principle' to sell his own courses?


If you have a gas station, do you try to sell refinery equipment too, in case one customer will come in and buy $150,000 of pipes and stuff?

--
Maybe I'm missing something, but I've never experienced the need to be this clever in a consumer facing business.

 

[MTF]

This seems like a really complicated way to think about business.

Did this guy make up a 'clever sounding business principle' to sell his own courses?


If you have a gas station, do you try to sell refinery equipment too, in case one customer will come in and buy $150,000 of pipes and stuff?

--
Maybe I'm missing something, but I've never experienced the need to be this clever in a consumer facing business.

As far as I know he's mostly selling business/marketing advice. In this space you'll find people who can only spend $7 and guys who'll happily spend $70,000 as long as you can provide sufficient value.

The concept probably doesn't always translate directly into other industries but the overall idea (of increasing revenue per customer through offering more expensive options) does.

 

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[Fox]

I ran a bar business for 3 years and very much doubt that 1 of every 1000 customers I had would have been willing to spend 256 times more than their peers at my bar.

I guess the example here would be some very expensive whiskey or wine.

Or someone booking out the whole bar or paying for a cocktail course or something.

You just need to come up with some creative ways to cater for people who want to send a lot with your business. Cause there are those few who will for sure.

 

[terrordread]

As far as I know he's mostly selling business/marketing advice. In this space you'll find people who can only spend $7 and guys who'll happily spend $70,000 as long as you can provide sufficient value.

The concept probably doesn't always translate directly into other industries but the overall idea (of increasing revenue per customer through offering more expensive options) does.

Yeah, I think it might be more applicable in the context of selling a service as opposed to a physical product.

 

[Andy Black]

I ran a bar business for 3 years and very much doubt that 1 of every 1000 customers I had would have been willing to spend 256 times more than their peers at my bar.

Did anyone ever come in and book a corporate event?


I liked Perry Marshall's book "80/20 Sales & Marketing".

I like the concept of 80/20 being applied twice is 64/4... meaning 64% of your business can come from 4% of your clients, work, or effort.

If I recall correctly, Perry arrived at the rule of thumb that 20% will pay 4x.

James Schramko has a similar rule of thumb... that 10% will pay 10x.

The precise numbers aren't the point. It's about making us think there's different people who will pay different prices, and honing in on the work that makes the biggest difference.

I have these wee calculators too, and think about what I could sell at various price points.

For example:

• 5x $5,000/mth... Consulting
• 50x $500/mth... Productised Service
• 500x $50/mth... Courses Membership
• 5,000x $5/mth... Paid Email newsletter
• 50,000x $0.5/mth... YouTube Subscriber

If I got to 50k YouTube subscribers could I end up with 5k paid newsletter subscribers, 500 course members, 50 productised service clients, and 5 consulting clients?

I suspect I'd end up with more consulting clients, way more productised service clients, and less paid newsletter subscribers... but it's a good thought exercise.

 

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[David Fitz]

I read that book a few months ago and for a small book it has some quality info in it.

The coffee machine concept can be added to any business. Dan Kennedy talks about this too. There's always going to be one customer who wants to spend more.

 

[Johnny boy]

Moral of the story: include a high end, super profitable option if possible because some person will go for it eventually.

 

[Andy Black]

Moral of the story: include a high end, super profitable option if possible because some person will go for it eventually.

And it could also be used to anchor the price and make people see your main offer as more of a deal.

 

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[Black_Dragon43]

What do you think? Does anybody have insight into this they're willing to share?

The insight I got, which I am applying, is stop selling to the masses, start selling to the rich. If I can put the same effort in selling something worth $50,000 I should do that instead of sell something worth $500.

Personally I don’t buy Perry’s theory of having something for everyone. I say have nothing for the masses, because it usually takes work to fulfil, and you’re much better off investing that work in fulfiling for the rich.

If you’ll do this, and forget about everyone else, you’ll build an IDIOT-PROOF business. Meaning that your margins are so high, that you simply cannot fail.

 

[Andy Black]

Personally I don’t buy Perry’s theory of having something for everyone.

It's not just Perry who advises that. It seems common advice to have a value ladder to ascend people up.

Except this can spread your focus across different avatars. The DIY market is very different from the DFY market. And the DWY market is different yet again.

I say have nothing for the masses, because it usually takes work to fulfil, and you’re much better off investing that work in fulfiling for the rich.

I like the idea of having something super cheap for the masses. Like a YouTube channel or low priced paid email newsletter. I think I'd rather that than a high end consultancy.

 

[Black_Dragon43]

It's not just Perry who advises that. It seems common advice to have a value ladder to ascend people up.

Right, I think it became very popular after Russell Brunson’s DotCom Secrets became a bestseller.

However, I used to do this approach, and now I disagree with it. At least for smaller businesses.

You are right that it does spread your focus to multiple avatars… and that’s a problem because instead of solving just one specific issue, you’re now in the business of solving many different issues. And your economics become messy.

High numbers are a problem. The more clients you have, the more sources of potential problems you have. This strains your resource, and most importantly time, which means you have less to allocate to growth. That’s why most business struggle to grow and scale - they simply cannot do it, because their economics aren’t good enough.

I spoke about an idiot-proof business above. What I mean by that is a business that makes so much money that even if you run it badly, it’s still profitable and has resources to grow.

Here’s a clear example. We both sell a lead generation service, you sell yours for $500/mo, I sell mine for $10,000/mo. Obviously we have different avatars - the guys who can afford yours most likely can’t afford mine.

Now you work hard one month (probably very hard), and secure 10 clients for your business. I do the same.

You’ve brought $5,000 in revenue. That’s probably barely enough to cover your own salary and expenses. You can’t hire anyone, there’s little potential for expansion here. Plus you have to deal with fulfilling the service for those 10 people.

On the other hand, I brought in $100,000 in revenue in the same month. I have money to hire 10 people easily, rent a building, pay some agency to try some marketing for me, and pay myself too. Now can you see how I would be growing much faster than you? My economics are simply idiot-proof. I don’t even have to be smart - I can hire some random agency, pay them $2,000 and if it doesn’t work, not care about it.

I like the idea of having something super cheap for the masses. Like a YouTube channel or low priced paid email newsletter. I think I'd rather that than a high end consultancy.

In my opinion, having something super cheap for the masses is asking for problems. Even if it is responding to an email that you get for people asking about things before buying, that is a problem. You or someone else needs to invest time to solve it, and what’s the return? $9?

I used to sell a $49 product on the forum when I sponsored it. When the sponsorship ended, I just took the product off the market, because why would I want anyone from my team being busy with answering questions by email to people who are interested in the product? Sure, we have a document with all the questions anyone can ask because they repeat and with answers that you just have to copy/paste. But why do that? It’s a distraction - I don’t want mysef or anyone else on my team distracted to make what, $49?

Think about Elon’s strategy with Tesla. Make a cool electric car for rich people - the Tesla Roadster. Make the profit margin so high on that, that you can cover your development costs much better. And only then expand to the masses.

Most people struggle to scale because their economics barely allow them to do it. They have to cut into their own share or salary to do it, because the economics don’t make sense. If I sell a $500 service, it’s just as hard to find a client as it is if I sell a $10,000 service. And the clients create just as many problems, actually the lower paying clients create about twice or three times as many problems from my experience.

It’s just as hard to sell the $500 client as the $10,000 client because I must build a foundation of trust with both of them, and doing that takes just the same amount of time in both cases. So the ROI on your time is much lower for the $500 client. Low ROI = bad economics = you can’t grow

 

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[Andy Black]

Right, I think it became very popular after Russell Brunson’s DotCom Secrets became a bestseller.

However, I used to do this approach, and now I disagree with it. At least for smaller businesses.

You are right that it does spread your focus to multiple avatars… and that’s a problem because instead of solving just one specific issue, you’re now in the business of solving many different issues. And your economics become messy.

High numbers are a problem. The more clients you have, the more sources of potential problems you have. This strains your resource, and most importantly time, which means you have less to allocate to growth. That’s why most business struggle to grow and scale - they simply cannot do it, because their economics aren’t good enough.

I spoke about an idiot-proof business above. What I mean by that is a business that makes so much money that even if you run it badly, it’s still profitable and has resources to grow.

Here’s a clear example. We both sell a lead generation service, you sell yours for $500/mo, I sell mine for $10,000/mo. Obviously we have different avatars - the guys who can afford yours most likely can’t afford mine.

Now you work hard one month (probably very hard), and secure 10 clients for your business. I do the same.

You’ve brought $5,000 in revenue. That’s probably barely enough to cover your own salary and expenses. You can’t hire anyone, there’s little potential for expansion here. Plus you have to deal with fulfilling the service for those 10 people.

On the other hand, I brought in $100,000 in revenue in the same month. I have money to hire 10 people easily, rent a building, pay some agency to try some marketing for me, and pay myself too. Now can you see how I would be growing much faster than you? My economics are simply idiot-proof. I don’t even have to be smart - I can hire some random agency, pay them $2,000 and if it doesn’t work, not care about it.


In my opinion, having something super cheap for the masses is asking for problems. Even if it is responding to an email that you get for people asking about things before buying, that is a problem. You or someone else needs to invest time to solve it, and what’s the return? $9?

I used to sell a $49 product on the forum when I sponsored it. When the sponsorship ended, I just took the product off the market, because why would I want anyone from my team being busy with answering questions by email to people who are interested in the product? Sure, we have a document with all the questions anyone can ask because they repeat and with answers that you just have to copy/paste. But why do that? It’s a distraction - I don’t want mysef or anyone else on my team distracted to make what, $49?

Think about Elon’s strategy with Tesla. Make a cool electric car for rich people - the Tesla Roadster. Make the profit margin so high on that, that you can cover your development costs much better. And only then expand to the masses.

Most people struggle to scale because their economics barely allow them to do it. They have to cut into their own share or salary to do it, because the economics don’t make sense. If I sell a $500 service, it’s just as hard to find a client as it is if I sell a $10,000 service. And the clients create just as many problems, actually the lower paying clients create about twice or three times as many problems from my experience.

It’s just as hard to sell the $500 client as the $10,000 client because I must build a foundation of trust with both of them, and doing that takes just the same amount of time in both cases. So the ROI on your time is much lower for the $500 client. Low ROI = bad economics = you can’t grow

I think the point/crux is that if you get 10 clients at $10k/mth then I'd get 100 clients at $1k/mth. Scaling may be different. Yours may be a consultancy scaled by people and processes. Mine may be a productised service scaled by fewer (high paid) people and more automation. They're different models. I'd prefer the second.

For a high volume paid email newsletter you don't have to reply to every email, especially if you say you don't. It's not expected and I'd unsubscribe people who demanded a reply.

All I'm saying is there's lots of ways to skin a cat, and lots of cats to skin.

 

[Black_Dragon43]

I think the point/crux is that if you get 10 clients at $10k/mth then I'd get 100 clients at $1k/mth.

So the thinking goes... it should, theoretically, be basic economics. Higher price equals less demand, right?

But I haven't found this to be true in practice. I think this is true for services and/or products that are concrete and/or commodities. Say like selling a wallet. Or a microphone. Or something of this kind.

I have tried to scale a productized service for copywriting in the past. It's just as hard to get those clients at $100 or less as it is to get much more expensive clients for thousands of dollars a month. So I shut down the service in probably 2-3 months, and it probably made between 500 to 1000 USD in revenue in that time.

Why? Because the service and the results are abstract. For cleaning, it's easy to determine if a good job has been done. For copy, it's not so easy. And nobody wants to risk. So factors such as "do I trust the seller?" and "will this give me the transformation I want?" come into play. And this makes selling difficult, regardless of the price. In fact, many times a lower price makes it even harder to make the sale, since the buyer is more skeptical.

So I don't know - have you ever managed to secure 100 clients at $1k/mth? In one month I can get 5x clients at $10K. Maybe I'd be able to get 6 or 7 clients at $1K. But still big big difference in terms of effort:reward.

 

[Andy Black]

So I don't know - have you ever managed to secure 100 clients at $1k/mth? In one month I can get 5x clients at $10K. Maybe I'd be able to get 6 or 7 clients at $1K. But still big big difference in terms of effort:reward.

I haven't tried to scale. I was talking hypothetically and explaining my thoughts on the 80/20.

Lots of people make it work at lots of levels.

 

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[Black_Dragon43]

I haven't tried to scale. I was talking hypothetically and explaining my thoughts on the 80/20.

Lots of people make it work at lots of levels.

I see. I have tired to scale before, but haven't succeeded with low-ticket productized services. So when you achieve that, it would be interesting to hear about how you've done it.

On my end, I can say it as a fact that I can get 5 customers to pay $10K in a month, from absolute nothing, and can do so repeatedly. But probably I can't get 50 customers to pay $1K in a month. The only people who can do the latter, I imagine, are those who already have a sizeable audience. I can't imagine myself getting 50 customers to pay $1K in a month. Like what would I even have to do to make that happen? I don't even see how I'd have time to connect with so many prospects in a month to secure 50 customers out of them.

 

[Andy Black]

I can't imagine myself getting 50 customers to pay $1K in a month. Like what would I even have to do to make that happen? I don't even see how I'd have time to connect with so many prospects in a month to secure 50 customers out of them.

These sound like good questions to ask yourself. This is what I meant by creating that scale of price points and client/customer numbers at that price point, and then thinking about what the offer/service/package might be.

You said you can't imagine having time to connect with that many people per month.
Maybe turn that into a question or challenge?

How could you acquire 10 clients next month where you didn't have to connect with them?

My first thought would be partnering with a business that already has hundreds of your ideal clients.

I get most of my clients from agencies, either through referrals or whitelabelling to them. I'm working with a Facebook Ads agency that has 200 clients in the same industry. If we can make Google Ads work for that industry then he could being 50 clients in one go. That's too much for me to handle immediately, but I'd ramp up if the numbers stacked up.


What about getting a steady stream of new subscribers to an email newsletter? If they're only paying $5/mth then it wouldn't make sense to connect or chat with them beforehand. That would be wasting your time and theirs. In which case setting up ads that go straight to a checkout page might be the way to go.


And what about growing a YouTube channel for Adsense income initially? Different business model (maths) that relies on a larger scale, but where the sign up is a simple click on a Subscribe button.


My takeaway from 80/20 and James Schramko's "10% will pay 10x" isn't just to go upstream, or to go downstream, or to have an offer at every price point. It's simply to realise there's often different numbers of people willing to pay at different price points. And that it's a good exercise to think about what we might offer at those price points, while realising it's probably best to focus on one, at least initially.

 

[Andy Black]

Thought it worth linking to @MTF's thread:

• The 80/20 Principle Library

 

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[Black_Dragon43]

My first thought would be partnering with a business that already has hundreds of your ideal clients.

Partnerships are good, but who would own the clients in such a case?

I get most of my clients from agencies, either through referrals or whitelabelling to them. I'm working with a Facebook Ads agency that has 200 clients in the same industry. If we can make Google Ads work for that industry then he could being 50 clients in one go. That's too much for me to handle immediately, but I'd ramp up if the numbers stacked up.

Hmmm... well, 50 clients in one go, at say $500-1000/mo, that is $25,000 to $50,000 per month. You could charge all 50 upfront, hire 3-4 people, and ramp them all up in 1-2 weeks. It may be a bit messy at some point, but probably can be done. With 4 people, it's approximately 13 clients per employee, which is manageable. That leaves probably around $10K-30K/mo net for you.

What about getting a steady stream of new subscribers to an email newsletter? If they're only paying $5/mth then it wouldn't make sense to connect or chat with them beforehand. That would be wasting your time and theirs. In which case setting up ads that go straight to a checkout page might be the way to go.

I don't know... I honestly don't want a $5/mo subscriber, because every month I need to issue an invoice for that subscriber. Imagine 100 invoices. Even if they are issued automatically, someone has to deliver them to the accountant, someone has to then check the accountant that they were filed properly, and so on. I'm not really looking forward to it, and it's all that work for $500/mo! Imagine reading through 500 entries every month, it's already giving me headaches lol

As I was saying earlier, my point is that high numbers = lots of problems. Every client you bring into the company, whether they pay you $1 or $1,000,000 will involve what I call deadweight work - work that has to be done just because they paid you some money. This will include accounting stuff, customer service/success, space on a list, plus of course the fulfillment tasks required. All these factors are imo distractions, the less, the better.

To set up Google Ads for 1 client that pays $500, I would imagine takes at most HALF or maybe ONE FOURTH the time it takes to set up a campaign for a $30,000 per month client. But it certainly doesn't take 60 times less time right? At the same time, the income is 60 times smaller. Which shows us that there is time inefficiency associated with small clients.

When you move upstream, you minimize deadweight work, and maximise profit margins. Whereas when you move downstream, you maximise volume and deadweight work, and lower profit margins.

 

[Hong_Kong]

I recently read Perry Marshall's book 'Detox, Declutter, Dominate: How to Excel by Elimination' and thought it was pretty good. In short, it's about focussing your time and energy on the small percentage of things you do that yield the highest return. It's very short and takes about an hour to read.

In the book, Marshall outlines the principle of having an espresso machine in your business. He says that for every 1000 customers that go into Starbucks and spend $5 on a coffee, 1 will scratch their coffee itch by buying a really expensive espresso machine. He arrives at this by applying the 80/20 rule which states that 80% of your profits come from 20% of your customers.

So if 1000 people come in for a $5 coffee, 20% of them will spend 4x more than the other 80%, meaning 200 will spend $20 each. Of those 200 people, 20% are willing to spend 4x more than the other 80%. That results in you having 40 people coming in and spending $80 each. Within this group of 80, there will be a further 20% who will spend 4x more than those other 80% - 8 people at $320 a pop. Of those 8 people, 20% are willing to spend 4x more which now leads to 1.6 (but round it down) will spend 4x320 on a product in your shop if they think it's valuable enough. So of 1000 people, 1 person will spend $1280 with you if you give them the chance.

It's worth noting that in the book he also says you can't sell a $5 cup of coffee for $1280, but as long as the product is perceived as distinct enough from the coffee and offers what the customer deems as a good deal, you will make the sale. There's a link at the bottom of this post to him giving a talk on this idea if you want it straight from the horse's mouth.

Here's the thing though, I'm not sure that this principle is actually true.

I ran a bar business for 3 years and very much doubt that 1 of every 1000 customers I had would have been willing to spend 256 times more than their peers at my bar.

What do you think? Does anybody have insight into this they're willing to share? I'd love to be proven wrong or have my mind changed.

View: https://www.youtube.com/watch?v=BXTaiq2Dh4s

This is a great point. Dan Kennedy touches on this point as well a few times. He also added it is hard to build a big business with just one product. Upsells, cross-sells, add-ons, package deals, memberships, etc. Apple is a good example of a "product ecosystem".

For the examples in here with a bar, it still follows the principle. Some people pay single digit dollars for one drink, some people get VIP booths with bottle service and spend thousands. If the bar doesn't have VIP service its missing out on those customers. The bar could also offer a lifetime membership where you can skip the line, or get free valet parking (or some other perk like special drinks only for members). If you get creative this principle can be applied to any business.

Another way to think about is a "value ladder".

https://miro.medium.com/max/3840/1*Ml2_amqcwLqCHD4Ke82IIQ.jpeg

 

[terrordread]

Did anyone ever come in and book a corporate event?

Lightbulb moment! I was thinking about this concept far too narrowly.

Yes, tons of people would enquire about booking us privately and a percentage of those went on to become accounts with us. The corporate events we sold were by far the easiest, most profitable activity in the business.

The AOV per person was c. $7 for a drink whereas corporate events would net us nearer 3k for about 6hrs work.

Having connected the dots I'm now sold on this principle. Thanks @Andy Black, that little comment prompted me to see the answer to this thread topic.

 

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