From: alexhormozi
Understanding value creation is presented as a fundamental way to generate significant wealth rapidly [00:21:23]. The speaker, who claims to have earned more in a year during his 20s than the combined CEOs of major corporations like McDonald’s, Ford, Motorola, Yahoo, and Ikea, attributes much of his success to this principle [00:00:00]. The core idea is that you cannot sell based on your own costs, but rather on the value you create for someone else [01:50:00]. This approach allows businesses to charge and profit significantly more than competitors in the same market [01:56:00].
The Value Equation
The “Value Equation” is a framework designed to operationalize the concept of creating value [01:12:00]. It consists of four key components [01:15:00]:
- Dream Outcome [01:19:00]: This refers to the ultimate desire or “big thing” people want [01:21:00]. Examples include making more money in a gym, losing weight, fixing a relationship, or even looking impressive to friends [01:25:00].
- Perceived Likelihood of Achievement (Risk) [01:33:00]: This addresses how likely a customer believes they are to achieve their desired outcome after purchasing the product or service [01:37:00]. The opposite of this is risk [01:35:00].
- Time [01:47:00]: This measures the duration between the start of the process and the realization of results [01:48:00]. The longer the time, the less valuable the offering [01:51:00].
- Effort and Sacrifice [01:56:00]: This considers how much effort a customer will need to exert and what they might have to start or stop doing to achieve the outcome [01:58:00].
The ideal product or service would be immediate, require no effort, be guaranteed, and deliver exactly what the customer wants, precisely how they want it [03:21:00]. This represents the most valuable version of anything that could be sold [03:28:00].
For business-to-business (B2B) settings, value often translates directly to monetary outcomes [03:36:00]. In business-to-consumer (B2C) settings, value needs to be abstracted to the emotional or aspirational benefits, such as looking good or feeling great [03:41:00].
Applying the Value Equation
The Gym Licensing Example
The speaker illustrates the value equation with a story about his company’s annual event for licensed gym owners [00:27:00]. When his father questioned the $42,000 annual fee charged to each of the 700+ attendees [00:39:00], the speaker used the value equation to explain the perceived value.
He posed a hypothetical scenario: “If you were able to pay a dollar and get $5 back, would you do it?” [01:00:00] His father’s response highlighted the components of the value equation:
- Perceived Likelihood: “What’s the likelihood that the five to one actually happens?” [01:10:00] (risk assessment)
- Effort & Sacrifice: “What would I need to do?” [01:19:00] (dedicate 10+ hours a week) [01:24:00]
- Time: “How long would it take?” [01:30:00] (about a year) [01:34:00]
The answer was yes, indicating that despite the high cost, the perceived value made the investment worthwhile [01:39:00].
The Table Example: Plastic vs. Hand-Carved
To demonstrate defining value and pricing strategies, the speaker compares a commoditized plastic fold-out table (100) to a $20,000 hand-carved wood table [04:16:00]. Both serve the basic function of holding items [04:33:00].
However, the value equation allows for differentiation:
- Dream Outcome: For the expensive table, the dream outcome isn’t just a surface; it’s the feeling of immediate impression and status when guests enter one’s home [04:48:00].
- Perceived Likelihood: Trends demonstrating the item’s popularity can lower the perceived risk of not achieving the desired status [05:20:00].
- Time: Offering immediate delivery (“have this at your house by the end of today”) creates urgency and increases value [05:27:00].
- Effort & Sacrifice: A “white glove service” for delivery and assembly eliminates effort for the customer, making the purchase effortless [05:36:00].
By addressing all these components, a business can justify a $20,000 price point, as the sale is no longer about the wood, but the perceived status and convenience [05:57:00].
Price as the Largest Lever on Profit
The speaker emphasizes that price is the single largest lever on profit [06:29:00]. Using the table example, a hypothetical financial breakdown shows the impact of increased pricing due to added value:
| Metric | Before (Plastic Table) [06:33:00] | After (Valuable Table) [07:05:00] |
|---|---|---|
| Price | $100 | $1,000 |
| Cost of Goods | $50 | 200 (delivery) = $250 |
| Other Costs | $30 | $130 |
| Net Profit | $20 | $620 |
This demonstrates a 10x increase in price leading to a 31x increase in profit [09:04:00].
Competing on price is generally a losing strategy, as only one business can win the “lowest price” battle [09:31:00]. Instead, there is a significant benefit to being the most expensive, which is directly correlated with the amount of value you can provide [09:47:00].
“There’s no reward you get for being the second cheapest competitor. You just lose a lot of money.” [09:39:00] — Dan Kennedy
To make the value equation work, the focus should be on figuring out how much something is truly worth to the customer, then delivering it by eliminating risk, making it faster, and easier [09:58:00]. This approach allows businesses to sell from the customer’s “future wallet” rather than their current one, essentially selling based on the future benefits and problem-solving provided [10:10:00].
Conclusion
The principles of value creation are foundational for increasing business value and achieving significant financial success. By focusing on the four components of the value equation (Dream Outcome, Perceived Likelihood, Time, and Effort/Sacrifice), businesses can justify premium pricing, enhance profitability, and decouple themselves from destructive price wars [03:58:00]. This strategy is also closely tied to concepts like wealth alchemy, which emphasizes how customer acquisition and retention contribute to enterprise value [01:17:00].