This is Our Competitive Edge Ep 417



In a dynamic discussion, Alex Hormozi unpacks strategies for increasing personal and business income by enhancing value creation and negotiation skills. Hormozi emphasizes the importance of providing unique value, both as an employee and a business owner, to command higher compensation. He advocates for variable compensation based on direct contribution to a business's bottom line and underscores the necessity of being irreplaceable by developing specialized skills or services. Additionally, Hormozi highlights the significance of selecting the right customers or employers, as the potential for income is influenced by the market one operates within. Throughout the conversation, Hormozi also touches on the power of supply and demand dynamics, the leverage of having multiple options during negotiations, and the potential of aligning with businesses that have expansive visions, allowing for greater wealth creation for all involved.

Summary Notes

Impact on Business Bottom Line

  • Discusses strategies for increasing personal income by creating more value in a business.
  • Suggests asking for variable compensation based on the value provided.
  • Emphasizes the uniqueness of one's contributions to negotiate better pay.

"We're going to quantify how we can directly impact the bottom line of the business. We're going to ask for variable compensation around the value that we are providing for the business. And we're going to be able to get it because no one else can do it."

The quote highlights the approach of quantifying one's impact on a business's bottom line and negotiating compensation based on the unique value one brings to the table.

Understanding Variables Influencing Pay

  • Identifies the need to understand what influences pay.
  • Mentions the concept of inversion thinking as a tool to analyze this.
  • Suggests that creating value and the ability to negotiate are key variables.

"So I think the easiest way to solve this dilemma or this problem for not getting paid enough is to understand what are the variables that influence pay."

This quote sets the stage for the discussion by stating that understanding the factors that influence compensation is crucial for solving the problem of not getting paid enough.

Inversion Thinking

  • Alex Hormozi introduces Charlie Munger's concept of inversion thinking.
  • Uses inversion to identify what would lead to making as little money as possible.

"And so I think a fun process is to go through this and think about it using inversion thinking, which is something that Charlie Munger champions and a lot of other great thinkers."

The quote introduces inversion thinking as a method to tackle the problem of increasing one's pay, which is a strategy championed by Charlie Munger and other thinkers.

Providing Value

  • Highlights the importance of providing significant value to a business or customer.
  • Indicates that the potential to earn is tied to the value created and one's negotiation skills.

"Well, number one, we would provide very little value."

This quote is part of the inversion thinking exercise, stating that providing little value is a sure way to earn less, implying that providing significant value is key to earning more.

Negotiation Skills

  • Asserts that the ability to negotiate determines the percentage of value one can claim as compensation.
  • Suggests that negotiation is a critical skill for maximizing earnings.

"The second thing that we would do is we would not ask for very much of that value that we were creating."

Here, Alex Hormozi explains that a lack of negotiation skills can lead to asking for less compensation than one's value warrants, emphasizing the importance of negotiation in earning potential.

Supply and Demand Dynamics

  • Discusses how being easily replaceable due to high supply affects one's earning potential negatively.
  • Points out that scarcity and uniqueness of skill increase one's value.

"The third one that we're going to look at is supply demand dynamics, meaning how easily replaceable is the value that we are providing."

The quote introduces supply and demand dynamics as the third variable affecting pay, suggesting that the more unique and irreplaceable one's value, the better the compensation.

Creating More Value

  • Advises on ways to create more value and improve negotiation tactics.
  • Discusses the importance of quantifying the monetary value created.
  • Mentions other forms of value beyond direct monetary contributions.

"So if you are an employee or you are a business owner and you are trying to get paid more, then we can invert this process and think to ourselves, what are the ways that we can, number one, create more value."

The quote suggests that creating more value is a primary way for employees and business owners to increase their earnings, which can be achieved by inverting the process of how one might earn less.

Communicating Value

  • Emphasizes the need to communicate the value created using multiple lenses.
  • Points out that understanding and conveying the value is key in negotiation.

"One of the keys in communicating value is using multiple lenses through it to see it, all right? And the easiest one is just the quantitative number value in terms of how much money are we creating."

This quote stresses the importance of being able to communicate the value one creates in tangible terms, such as monetary value, which is crucial during negotiations.

Picking the Right Customers

  • Highlights the significance of selecting customers who can appreciate and pay for the value provided.
  • Tells a story to illustrate the concept of value perception varying with the customer.

"So if you help someone lose weight, the amount that you can charge on that will depend on who you serve, right? Which would then actually get into a fourth bucket, which is picking the right customers."

Alex Hormozi uses an example to explain that the perceived value of a service can vary depending on the customer, implying that choosing the right customers is essential for maximizing earnings.

Understanding Value and Audience

  • The story illustrates that the perceived value of an object (or service) can drastically change depending on who is evaluating it.
  • The son's experience with the car shows how different parties attribute different values to the same item.
  • The father's advice highlights the importance of understanding the audience when determining value.
  • The anecdote serves as a metaphor for business owners to recognize the significance of their target market.

"So, listen, son, what I want you to see from this is that the value that someone would give you is not necessarily just a result of the vehicle, of who you are, but who you are talking to."

This quote emphasizes that value is not inherent to the object or person itself, but is a result of the perceived worth by the audience.

The Four Elements of Value

  • Alex Hormozi introduces four elements that determine value: the audience served, the value provided, the speed of delivery, and the effort required from the client.
  • These elements are applicable to both employees and businesses.
  • The 'value equation' can be reversed to increase one's worth in a professional setting.

"So I said number one was value. Okay? So value is going to be predicated on who we're serving and also how much value we can provide..."

This quote identifies the first element of value, which is predicated on the audience and the amount of value one can provide to them.

Making More Money as a Business Owner

  • Charging more can be a simple yet effective strategy for increasing revenue.
  • Business owners often undercharge because they base prices on their personal perception of value, not the customer's.
  • What seems easy for someone may be difficult for others, justifying a higher charge for services.

"And so as a business, we do this by setting our prices, right. That is fundamentally the negotiation that occurs is that we set our prices."

This quote discusses the act of setting prices as a form of negotiation, emphasizing the control business owners have over their revenue through pricing strategies.

The Lost Chapter and Upcoming Release

  • Alex Hormozi mentions the addition of a lost chapter to his book "100 Million Dollar Offers" to build hype for the upcoming "100 Million Dollar Leads".
  • The unreleased chapter focuses on customer segmentation and avatar creation to enhance profitability.
  • The chapter is offered in exchange for an email, ensuring fans get first access to the new release.

"I added in a lost chapter that has never been released. I'm releasing it now transparently. I'm doing that to build hype for 100 million dollar leads."

This quote reveals the strategic release of additional content to create anticipation and engage the audience ahead of a new product launch.

Value Perception and Pricing

  • Alex Hormozi discusses the perception of value and its impact on pricing.
  • He suggests that one's own perception of the value of their services may be skewed due to familiarity with the task.
  • Hormozi recommends allowing the market to set prices instead of setting them based on personal perception.
  • He emphasizes that what may seem easy to someone experienced may not be the same for others.

"And so what is easy to one person, because you have been doing it for so long, might not necessarily be easy to other people. And so your perception of the value is actually skewed, which is why you should not be the one necessarily setting your prices."

This quote explains that a person's familiarity with their own services can lead to undervaluing them, and that market-driven pricing is more effective.

Negotiation and Compensation

  • The second key idea Hormozi touches on is the importance of negotiating or asking for higher compensation.
  • He suggests creating variable compensation, especially for employees, by tying their pay to the revenue they help generate.
  • Hormozi explains that those who earn the most usually have variable compensation, including business owners whose income depends on business performance.

"We negotiate or ask for a higher amount, okay? And if you're an employee, an easy way to do that is create some sort of variable compensation for yourself and say, hey, these are ways that I think I can tie into the revenue of the business."

This quote highlights the strategy of negotiating for pay that is linked to the value created for the business, suggesting a direct correlation between an individual's contribution and their compensation.

Competitive Landscape

  • Hormozi discusses the impact of competitive dynamics on the ability to negotiate higher pay or prices.
  • He points out that having many people capable of doing the same job reduces leverage in negotiation.
  • The concept of being in a "category of one" is introduced, where specialization and niche services decrease competition.
  • As businesses scale, they may broaden their offerings but should leverage their depth of knowledge and experience.

"So value negotiation skill. And the third one, which is competitive landscape or competitive dynamics or supply demand for the job to be done."

This quote introduces the third key idea of understanding and navigating the competitive landscape to enhance negotiation power.

Niche Specialization and Unique Value

  • Hormozi advises starting with a niche focus to provide high value to a specific customer base.
  • He suggests adding unique features, bonuses, and guarantees to create compelling offers that are difficult for competitors to match.
  • The goal is to capture a larger percentage of the value created by being the sole provider of a specialized service.

"The easiest thing to do, which is why I talk about this in the book, is niche down at first, so that we can get really good at delivering one very specific, high amount of value to a very specific customer, right?"

This quote emphasizes the strategy of beginning with a niche focus to become highly skilled at delivering specific value, which can lead to commanding higher prices.

Employee Strategy for Increased Compensation

  • Hormozi applies the previous concepts to employees, suggesting they use their unique skills to impact the company's bottom line.
  • Employees should aim to quantify their direct impact on revenue and negotiate variable compensation based on this value.
  • The unique contribution of an employee can justify higher compensation if no one else can provide the same value.

"So if we are an employee and we want to make more money, then we're going to use our unique skills and experiences and we're going to try and quantify to the highest degree possible how we can directly impact the bottom line of the business."

This quote advises employees on how to leverage their unique skills and contributions to negotiate for better pay, reinforcing the idea of direct value creation as a basis for compensation.

The Importance of Your Opportunity Vehicle

  • The industry and business you work for significantly influence your earning potential.
  • Certain businesses inherently have limited financial ceilings, affecting how much employees can earn.
  • Working for a business with limited revenue potential restricts your own financial growth opportunities.

"If you work at a dry cleaning business, it will be very difficult for you to make a million dollars a year, and that's because the business doesn't make a million dollars a year in all likelihood."

This quote emphasizes the direct correlation between the earning potential of a business and its employees, highlighting the importance of choosing the right opportunity vehicle.

Vision and Attracting Talent

  • A business needs a large enough vision to accommodate the aspirations of its employees.
  • Companies with expansive visions are more likely to attract top-tier talent.
  • Employees should seek businesses that offer learning opportunities and substantial earning potential.
  • The concept is supported by the insights of successful individuals like Steven Schwarzman of Blackstone.

"You need to have a vision that is big enough for your business that others people's visions fit inside of it."

Alex Hormozi is conveying the idea that a business must have an ambitious and inclusive vision to attract and retain exceptional talent.

Learning and Earning in Your Career

  • Working should result in either learning, earning, or ideally both.
  • It's advisable to leave a job if it provides neither educational nor financial benefits.
  • Recent job market trends show a significant number of people quitting jobs that don't offer growth opportunities.

"There's only two things you should be working for. Whether you're learning or you're get paid, you should get paid in one or two, or ideally both ways when you work, which you should be learning all the time, and you should be earning."

Alex Hormozi stresses that personal and financial development are crucial reasons for working, and one should not settle for less.

Business Owners and Employees: Value Creation and Capture

  • Both business owners and employees should focus on creating value for customers.
  • The ability to capture value is crucial and can be achieved through effective pricing and negotiation.
  • Business owners and employees share similarities in value creation, with the main difference being their proximity to the customer.

"As the employee, we do the exact same thing, except our prices are the wages that we charge."

Alex Hormozi draws a parallel between how business owners and employees operate, emphasizing that employees essentially sell their services to businesses, much like how businesses sell to customers.

The Art of Negotiation and Leveraging Options

  • The key to negotiation is having multiple options, which provides leverage.
  • In both business and personal contexts, more options equate to a stronger negotiating position.
  • High compensation for CEOs and other high-level positions is due to the scarcity of individuals capable of fulfilling those roles effectively.

"He who has the most options wins the circumstance."

Alex Hormozi articulates a fundamental principle of negotiation, suggesting that having alternatives strengthens one's position in any negotiation.

Compensation Structures in Impactful Businesses

  • Businesses with grand goals that aim to impact humanity can afford to pay their employees and executives well.
  • Compensation often includes variable components based on the business's performance.
  • Both business owners and employees can achieve significant wealth if the business's vision and structure support it.

"Those guys can make that kind of money because they are operating within a business that has a massive dream that is really to impact humanity overall."

Alex Hormozi explains that substantial earnings are possible within businesses that have large-scale, impactful visions and goals, benefiting both owners and employees through performance-based compensation structures.

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