I have noticed that a lot of people get confused with regards to how to actually make money. I’d say the majority of people either aren’t interested or just don’t have a clue where money comes from or what it is. There seems to be a basic misunderstanding of why people get paid what they get paid and how to go about changing that.
I’ve said it before, but markets are actually very fair, because if you can indicate that you have something people want then you will be remunerated in a fair way. You can make something people want by creating “value”.
An interesting thought experiment would be to imagine a world with no money. If we were to live in this world and we wanted to “buy” a product or a service from someone what would we do? We’d probably either trade something that we perceived to be of equal value whether that be a physical object or our time and effort.
Profit happens when a consumer pays relatively more for a product or service than the actual cost of making the product or providing the service. Basically in this scenario value was created: X amount of value was created and the person selling their product or service captured Y% of X. This is all businesses do.
The mistake people make is thinking that money is value. This is completely wrong. Money is merely a means of trading value in a form society has agreed upon.
If you have a job, your pay cheque is a reflection of how much value you bring to the world. You may believe you are worth more, but generally speaking you are getting paid your fair market rate for someone with your skill set. There are artificially low wages in certain industries; For example doctors in the NHS get paid below their true value, however, everyone (including doctors) are aware of this and is part and parcel of having a socialised healthcare system.
The thing is that having a regular job as part of a large homogeneous mass (such as a group of doctors) inherently means that the value you are bringing to the world has been lowered. The main reason here is because you’ve lost “leverage” over your contribution to the outcomes which are considered valuable. If you are merely just another cog in the system which can be interchanged and replaced, then you have not brought enough value to be remunerated in an exceptional way.
This is why doctors continue to develop their skills, get more degrees and recognised qualifications, so that they can demonstrate that they bring more value to the world, but also because they can then leverage those qualifications to do things that other people can’t and produce outcomes which they are directly responsible for.
People ask why GPs get paid so much (locum GPs can earn £125K + a year with six weeks of holiday if they are smart) – but it’s because they bring a lot of value to the world (primary care saves a lot of money which has been proven in many studies) and they are able to leverage their work directly to themselves (GPs see patients by themselves, with no other healthcare provider involved and usually if a partner is off ill then there isn’t a replacement “cog” available).
So essentially the two variables that you have to play with when thinking about making money are: “value” and “leverage”. These are the two things you can play with if you want to make more money.
The way entrepreneurs get rich is by maximising both of these things. They create something which is valuable to the market – usually by solving a problem which a lot of people are experiencing and are willing to pay for. They then create a system – aka a business – where they get all the credit / leverage for solving the problem.
The interesting thing for me is how much control we have over both of these variables. I disagree with people when they talk about rich people who got “lucky”. If you make something a lot of people want and are able to leverage that yourself, then you will make money. The world isn’t yet that crazy for this to not happen.