The Law of Margins

The Law of Margins

 The Law of Margins

By Samuel Aiki

Article

In 2003, Cristiano Ronaldo, an 18 year old Portuguese footballer caught the attention of Manchester United manager, Alex Ferguson, who signed him for £12.24 million (€15 million). Six years later, CR7, as he had popularly been re-christened, became the most expensive footballer in history after moving from Manchester United to Real Madrid in a transfer worth £80 million (€93.9 million/$131.6 million). In addition, his contract with Real Madrid, in which he is paid €12 million per year, makes him one of the highest-paid footballers in the world, and his buyout clause is valued at €1 billion as per his contract. The question is “How does a man increase his worth by over 500% in just 6 years?”

 

Economists in the late 19th century explained that the value of a given thing – a corporate brand, a footballer, an engineer, a sales clerk, even a President – is subjective. It depends entirely on how people value that thing at a given moment. In fact, a sale takes place largely because a given buyer values the product higher than he is willing to pay for it, while the corresponding seller values the money he would receive higher than the product he is willing to trade. This value judgment (on the part of the buyer) takes place within such split seconds that Malcolm Gladwell described as the moments of the “Adaptive Unconscious” or over extended periods of analysis (usually by the seller). Even as much as I believe football clubs, employers of labour, project clients and buyers take more time to sift through the alternatives they have and sometimes work through some complex analysis before calling their banks, the most effective decisions are made with recourse to the margin. How much better is CR7 than Antonio Valencia? Or what extra value will CR7 bring to our team that we don’t already have? Positioning oneself strategically to satisfy a target buyer’s perception of the margin has proven profitable time and time again. So, it’s not about the qualifiers, it’s about the differentiators!

 

Figure 1 The “Get” Ecosystem

Gary North, a US journalist described microeconomics as the study of who has the money and how I can get my hands on it. Money is basically an exchange medium for value. In essence, value is being traded. Money in itself is of no intrinsic value. They call it Fiat money!

 

In Figure 1, I have identified 12 value elements that people pay for. Blue Brand (Intellectuals): Experience, knowledge and special talents; Green Brand (Growth): time; Purple Brand (wealth markers): technology, materials, intellectual property, property, information, investments; Red Brand (Feelings): networks/relationships, brand; Yellow Brand (Light bulb): Creativity.

 

It is therefore instructive that for a man to increase the size of his exchange medium, money, he needs to increase in any of those 12 value elements. For obvious reasons, it is better to develop multiple streams of income by majoring in more than one value element.

 

If you ever wonder why your boss gets paid more than you even though he does so much less, you must think to the margin – experience, or why an Apple MacBook costs about twice the price of a Samsung laptop, think to the margin – technology, brand and the user experience, or why network marketing dazzled many in the first decade of this millennium, think to the margin – the desire to profit from networks/relationships or why CR7 is more glamorous than Lionel Messi, I’d say a rare talent coupled with a solid personal brand.

 

I believe the time element of the Get Ecosystem is the ultimate value resource, because it is limited in quantity and it thus constrains the capacity to acquire the other 11 value markers. You can acquire more information by association, improve your creativity through stimulus variation or enlarge your networks by meeting people and participating in social networking, but your time is limited today and in your life. Hence, it would be folly to trade time for money. Any vocation or endeavour that only gives a pecuniary benefit is not worth doing at all. Steve Jobs once said “We don’t get a chance to do that many things, and everyone should be really excellent. Because this is our life. Life is brief, and then you die, you know? So this is what we’ve chosen to do with our lives. We could be sitting in a monastery somewhere in Japan. We could be out sailing. Some of the executive team could be playing golf. They could be running other companies. And we’ve all chosen to do this with our lives. So it’d better be damn good.”

 

When next you have to make a career or personal decision, think consciously to the margin! The extra value!

 

Samuel Aiki wrote this article. He is a co-founder at Foodlocker, an e-Commerce + Agritech + Retail start-up. He has strong interests in infrastructure development, business turnaround, brown and green field projects, strategic alliances, financial markets, operations, start-ups, capital raising, project finance, real estate and investments.

 

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