Best results are achieved through leverage.The more personally you get involved with small things not worth your value, the poorer you become. What you offer in return for money is an important consideration and directly linked to the amount of money you’ll receive. It is ‘value collateral’. You see, there are five levels of the pyramid which are also linked to levels of leverage. Once you are aware of the pyramid of value exchange, your single aim in your efforts to create Wealth should be to move more of your efforts higher up the pyramid.
Every level of the pyramid has its own rules and laws and path to mastery, so let me show you the pyramid and give a few short explanations to every level.
Level 1: money in exchange for time
This is generally the job or self employed level. Yes, you can create more value by upping your skills and becoming a highly paid expert or consultant, and there are a handful of people who get paid a lot of money in high positions, but as a general rule this is classed as the bottom of pyramid because you can’t leverage it.
If you don’t show up, you don’t make money. Your time, which is of course limited, is the subject of exchange.
I do spend some of my time here – like my £20,000 consulting days or my highly leveraged workshops, but it has limits and is un-leveraged and is at risk from illness, burn out, lack of motivation, industry change or regulation and so on.
Level 2: money in exchange for people’s time
Here is where you are a business owner and start to use other people’s time to extend your leverage.
The secret is simple.
You work 8 hours a day. If you have 2 employees working 8 hours a day for you, you in essence have 24 hours a day (3 people working 8 hours), where you create exchangeable value in the market place.
Systems and processes, key metrics or KPI’s as they are sometimes called and mastering the skill of managing people and leadership are on the menu. I have a small team of employees, most of them in low price economies who help me achieve more and control costs.
And as I grow and get more Human Capital, I will earn more on other people’s time.
This is how Bill Gates got so rich; he had 50,000 staff all working 10 hours a day for his legacy. That is 50,000 x 8 which is 400,000, 8 hours a day. If on average they bring in £25 an hour each (likely to be more) then that is £10,000, 200 a day in income.
That is £70,001,400 a week and a year is £3.640073e+9 on my iPhone calculator.
I guess that’s a lot!
Bill will show up again in Level 4: Service, as software is one of those cool things you can sell that is highly leverageable.
Level 3: money in exchange for products
Product based businesses have the ability to create a high level of Wealth, but are many times front loaded and cash intensive in the start-up phase. Of course, selling products is highly scalable, so making a few bucks from a million units generates a high level of leveraged Wealth.
You’ve done the work once and earn on it one million times; better than doing an hour of work then having to do another hour to get the same results, right?
As an additional asset you could be building a high value brand and loyal customer base that you can get repeat business from and further leverage.
My fiancée’s e-commerce business selling private label products using Amazon as a retail channel is a profitable, scalable, product business where she can create a brand and loyal customers.
I can then sell again and again to those repeat customers further increasing the leverage. In my case I used an unfair shortcut called white labelling, which means I don’t have the lag, cost and risk of developing products.
Level 4: money in exchange for services
Service based leverage is similar to products, but is in some ways more attractive as you don’t have to ship or sell physical products, and you don’t have stock or degradation issues.
Service based exchange can allow you to have recurring subscription income, which is highly predictable.
Also scalability is less of an issue than in product based business models with less ‘money on the shelves’.
Our online membership programmes are good examples of the service-based business model. If you can automate the ‘service,’ based element, for example using online software, video, audio, then you have further leverage.
If the service requires manual work that only has a one time benefit, it falls under Level 1. Of course you can see by now that all very successful individuals or companies use a combination.
Coming back to Bill Gates, it’s his Windows operating system at the core that created his Wealth. Then additional services and only recently products like the xbox or windows phones further added to his income stream.
Level 5: money in exchange for money
This is where the big guys make the money. Investing money in businesses, projects and ventures. The return can be mind-boggling. I’m not an expert in high finance, but you can create money out of thin air and pay less tax on your profits than at any other level of the pyramid, often even lower than a low-level wage slave!
I make some money from this level through private lending, investing for shares or stakes in businesses or joint venture projects. Because money attracts money, you can leverage your money to work hard for you, rather than you having to work hard for your money like you do in Level 1.
When companies float on the stock market money is created out of nothing. And if companies buy other companies to increase market share, the multiple of their value increases, again making money out of nothing. Still a mystifying area for me, but I’ll get there!
Banks lend out on a factor of 10:1 from cash holdings. They get ten times leveraged investment returns, and earn interest not just on the £1, but on 10x £1. Check out fractional reserve lending if you want to melt your brain. But that’s how the banks got so much money!
As money grows, money grows, and compounding kicks in; the 8thwonder of the world according to someone smart (and Wealthy).
So there you have it.
A short overview of the five levels of the value exchange pyramid. You can use each level as a leg up to the next level, and as you move up each level the good news is you can still get the leveraged benefit of the level you moved up from; further compounding the leverage.
The richest people in the world get the benefit of all five, leveraging many people at Level 1, so they can sit at the top of the Pyramid practicing their Dr. Evil laugh and plotting world domination plan.
Or maybe just finding more ways to help the world! Remember, it’s who you already are – magnified.
It’s all about knowing how, choosing your vehicles and then leveraging them – and of course keeping an eye on reducing your dependency on trading your time at the bottom of the pyramid on Level 1
Find something you have a burning passion for [your niche], find a way to change people’s lives with it [leverage], and write HUGE invoices [with a smile]
Magic happens for you and all when you put it all together