If you want to win any game, you need to understand the rules of the game first. If for instance you wanted to win at golf, you would need to know that you can not use your hands to pick up the golf ball but need to use the golf club instead. You would need to know that you need to start from the first hole and finish on the 18th hole.
Once you understand the rules of the game, it is easier to win as at least you know how to win the game.
So if creating wealth is the game you want to win, here is The Simple Formula for Creating Wealth. It is one that I created after doing much research on this topic so am always happy to hear if you agree or disagree (or how I can improve it) as I teach at many universities and schools and about to publish this in a book I am co-authoring.
The Simple Formula For Creating Wealth
Amount of Value You Can Add
x Number of People You Can Impact
– Number of People Who Can Do What You Do
– Cost to Serve
= Total Wealth Created
If you know basic algebra than you can see that we need to make the top two numbers as big as possible, and make the bottom two numbers as small as possible.
Amount of Value You Can Add
If a doorman opened a door for you than you might tip him a dollar. If a heart surgeon saved your life or the life of someone you love, you would pay her over ten thousand dollars. The heart surgeon has created more value than the doorman and so can make more money for her time.
This is why education is so important as when you learn how to do things better and quicker, you can create more value in less time and usually why the education level determines the income of a person. It might take you some investment to learn initially but over the longer term you produce more value for society.
The internet enables you to create more value to the world and hence increase your wealth. For instance, in the old economy if you wanted to publish a book you would have needed to find a publisher, while in the internet economy you can use a service such as Lulu.com or CreateSpace.com to publish your own books yourself and sell them through websites such as Amazon. As you are now the publisher as well as the author and the cost of distribution is a lot lower you can make over 50 % of a book price for your own profit whereas in the old economy an author would typically make 8 – 12 % royalties on a book (i.e. selling a $10 book in a store would only make you $1). You have to do more of the “work” but you are increasing the value you create for the customer so you end up making more money online.
Number of People You Can Impact
If the heart surgeon can make $10,000 for an operation than she can make $100,000 if she figured out how to serve ten times as many people.
Ray Kroc, the founder of McDonalds, figured out the systems and processes so that billions of burgers could be sold. At a time when most entrepreneurs around the world owned one or two restaurants, he began franchising so that many burgers could be sold and became one of the richest men in the world.
Bill Gates, became the richest software entrepreneur, as his software impacted millions of people. Oprah Winfrey became the richest entertainer as her television show impacted millions of people for the past 25 years.
If you lived in a village it was difficult for you to impact a lot of people as there weren’t too many customers around you. It was always easier to become rich in a crowded city like New York than it was in a village in Tanzania. Now as the internet has two billion users, you have a potential customer base of two billion to buy and use your product or service.
Number of People Who Can Do What You Do
Heart surgeons usually make a lot more money than doormen as it will take years of learning to become a heart surgeon, but anyone can learn to be a doorman within an hour. So heart surgeons are more unique and make more money.
This is where Adam Smith, the founder of modern economics, also wrote about the division of labor or “specialization” in his classic book “The Wealth of Nations“. If everyone could operate on a heart, or sing like Mariah Carey or hit a golf ball like Tiger Woods, than these people would not be able to create their own wealth. The more unique you become the more wealth you can create.
In developing countries there is often little “intellectual copyright” protection, so it is harder to be unique and so they make less money. In the United States a company such as Nike can develop and spend millions on advertising to make their brand unique – you can not make your own shoes and call them “Nike” and so Phil Knight, the founder of Nike, became a billionaire.
If we didn’t have intellectual property protection, than it wouldn’t be worth it for Bill Gates to spend millions of dollars to create the first copy of Microsoft Windows and then have other people copy it without putting in the investment in development.
Bill Clinton can charge $100,000 per speech as there is only one “Bill Clinton” – you could take his speech and read it, but as its not him, people won’t pay you that amount. Singers such as Celine Dion and Mariah Carey can charge over a million dollars for a single concert as they have created their own unique brands. You can listen to the CDs for $10 but if you want the real thing for an exclusive concert, you need to pay. The Coca Cola brand is worth billions as it is harder for me to create Amir Cola and create that same “emotional connection” that Coca Cola has managed to create with millions of people over the past century.
In the internet economy millions of people will be able to do what you do, so it is important to create your own brand and make yourself unique. Administration jobs will pay less and less as either computers will do them or people from a cheaper part of the world will take those jobs. There is nothing “unique” about entering data into a computer system.
In the old economy, American workers could earn a decent wage doing administrative jobs as they were more “unique” e.g. if you didn’t have a passport to work in the United States you could not get the job. Phone calls were expensive so it wasn’t worth outsourcing. Now those jobs that can be done by “cheaper people” are outsourced as the local administrators are not unique. Using a service such as oDesk, anyone can compete globally for a job that was much more “unique” in the beginning. Great news for entrepreneurs that want to hire, bad news for people that are relying on their place of birth to give them automatic wealth.
Whereas in the traditional economy, you had to move to places such as Hollywood or New York to get access to the big screen so you could become “unique” now through media such as YouTube and facebook you can become more unique. In the old economy, I would have had to get permission from Time magazine or Newsweek to publish this article and be able to reach you. Now, I write and create “unique content” which builds my own brand over the longer term period. You too can do the same.
Cost to Serve
Sam Walton became one of the richest people in the world by cutting costs for Walmart. Michael Dell managed to do the same for the computer industry.
The internet can drastically cut costs by enabling either consumers to do more of the work themselves or doing things cheaper online. For instance, Jeff Bezos, founder of Amazon.com became a billionaire by selling books online rather than in a traditional retail store. Now customers went through the check out process themselves rather than having a “cashier” take their money. Using warehouses to store the books in remote parts of the country was a lot cheaper than storing them in a bookstore in a busy shopping mall. So the cost to serve is reduced and Amazon can create more wealth.
Traditional bookstores such as Borders in the United Kingdom have gone bankrupt while online stores such as Amazon have created billions of dollars for their investors.
Whether it be through hiring or other means the internet has a great role in reducing the cost to serve in helping people create wealth.
Questions to Ask To Create More Wealth
So now that you have the simple wealth formula. Just ask yourself four questions:
1. How can I bring more value to the world?
2. How can I serve more people?
3. How can I become more unique?
4. How can I reduce the cost to serve?
Money is simply a way to keep score. It isn’t “evil” and it doesn’t grow on trees. It comes from following basic principles. Research the billionaires such as Bill Gates (Microsoft), Phil Knight (Nike), Steve Jobs (Apple), Ingvar Kamprad (Ikea), Mark Zuckerberg (Facebook), Jeff Bezos (Amazon) and you will find that they had a massive impact on some of these factors, if not all. Just as you would study the best golfers if you wanted to play better golf, you might want to study the best business people if you want to create wealth.
Most people that have become rich have figured out how to do at least one of these four things better. What will your strategy be?
How NOT to Create Wealth
When you are watching television or discussing politics in your living room, chances are not much wealth will be created in your life. Why? Because you are not creating any value. No one truly cares who you think should win the football game or cricket match. No value is being created. Your opinions in your dining room only reach your friends or family that are in the room so your wealth does not increase. You have no impact on the outcome of the game.
You can however, create a blog and share your opinions with the world. If now millions of people start reading or watching what you are saying about a cricket team or a certain football team than you can create wealth for yourself by selling the advertising on your blog.
When you are doing a certain activity (gossiping, watching soap operas etc) you should be able to tell is if value is being created for the world for what you are doing or not.
Applying The Simple Wealth Formula to My Own Life
So, you might be asking well “Mr. Amir, if you are so clever, than how are you applying this formula to your own life?”. I looked at my own work experience and one of the most rewarding was when I taught school kids computer science as a “substitute” teacher a few years ago in a high school in Islamabad, Pakistan. This was as an unpaid volunteer.
Now the dilemma came. I wanted to be rich, but a school teacher in an emerging country can make $100 per month. How could I figure out a way to do what I loved, yet still be able to create wealth?
This is where Webpreneur Academy comes in. I can add massive value as I help solve problems like how to take credit card payments online, how people from countries like Nigeria and Somalia can create global brands even though their “country brands” might not be the best globally. I do research that took me over a decade to learn the “hard way” in creating online businesses. I put together curriculum that I think every teenager, entrepreneur and person that wants to create wealth should go through and save them thousands of hours that I took to learn this. This is the value I create as I save people time.
Could people find all this information for free? Sure they can. But if an average student’s time is worth $10 per hour and I save them over 40 hours of doing things the long way around, than the value I create ($10 * 40= $400) is greater than the $397 investment that they make and so I have a viable business. I believe the value they get over the longer term is even ten times more than this (i.e. over $4,000) so it makes my business even more likely to succeed.
Number of People
A regular high school teacher can only impact a few hundred students that they can teach every month. Instead, we have created the online curriculum so that this can scale. It took over a year and over $200,000 in opportunity costs to teach the first few students how to create wealth online, but now every new student is a smaller incremental cost (e.g. 5 % which goes to credit card processing) and costs to support the student. As I charge $397 for an online course it will take us 500 students to “break even” and then we start making profit from our investment.
I run weekly webinars where people can ask questions online. Again these are all scalable. More and more people can take the course without me having to get up and teach everyday. As I blog, go on radio, television, launch books etc, I let more people know about the course I have created and the more people that end up benefiting, the more I benefit as well.
You too will not only have to create the product, but figure out how more people can benefit from it as well (i.e. sales, marketing and PR).
We created “Webprenuer Academy” rather than simply put the content online. I am well aware that the target markets I focus on have a tendency to “copy” products without paying for them (Bit Torrents galore). So we created an exam at the end of the course which students need to submit if they want the certification. We also give 20 % of the revenue to the school. These are steps to become more “unique” in the world. Going on television, newspapers, etc also help myself and Webpreneur Academy become more “unique” – so although some people may copy the content without paying for it – there will always be a percentage of people who want the “real” thing. You too will have to create a “brand” for whatever you produce (software, songs, movies, restaurants) as people will end up copying but there is always a percentage of people that want the real thing which make it worth your time and investment in creating the content or product.
One of my friends recently bought an “ePad” which is VERY close to an “iPad” but there are still enough people that will buy the original “iPad” even though it is seven times more expensive than the copy product. So if you are panicking that you will have competitors copy your product, just remember to focus on creating the brand. There will be others that teach “webpreneur” content but if we are the only ones you have heard of, than you will buy our stuff.
Cost to Serve
My time is expensive. I have charged companies such as Google, Microsoft and Samsung $5,000 for a day of my time. So how can I leverage it as most people can not afford this – especially as we focus on emerging markets and small business?
Creating the online course means that I have answered most of the questions that I get asked online. Most small business owners want to ask and do the same things (find more customers, access an idea, create a brand, sell more online, learn how to take payment etc ). So rather than having to repeat myself, the cost is drastically reduced as I have “cloned myself” through the online course. We also use “forums” to answer questions so that if a student has a question, I only need to answer it once and others can benefit. Having to answer everything individually by email as a teacher was less scalable. The cost to serve gets less and less as my experience grows in my field. You too will have a high cost to serve when you begin to service customers in your field but as you grow through the experience curve your costs will drop drastically.
Most businesses you start in the beginning will have a high cost to serve, but over time you and your team will learn on how to reduce these costs. As mentioned, teaching my first students cost me over $200,000 in “costs” to research, learning, testing and developing my content – now it costs me a few dollars to add on each new student to the system (credit card fees etc) but the cost to serve (my time) is getting less and less. We also invested many hours and hundreds of thousands of dollars in opportunity cost creating software such as HostMarkaz and ShopMarkaz but as more and more people begin to use our software our cost to serve gets less and less.
Summary of the Simple Wealth Formula
Money is a number in a database. As I write this to you, I could be worth a million dollars or be a million dollars in debt. The big difference is that there is a bank account somewhere (database) that has either a $1,000,000 or a -$1,000,000 as the score board.
In the short term when you are on the road to creating wealth your wealth might actually go down. YouTube for instance was losing a million dollars per month at the time that Google bought them out for $1.62 billion. Why? Because Google saw the value that YouTube was going to bring to the world (KhanAcademy.com changes the world of education for instance and is based on YouTube), the number of people impacted (over 36 hours of video uploaded every minute to YouTube), the brand (everyone had heard of YouTube) and seeing that the cost to serve was declining (the cost of bandwidth/servers drops by 50 % every 18 months – according to Moore’s law).
Many businesses such as twitter/YouTube/Amazon actually lose money for several years as the investment in the Simple Wealth Formula is being built and so the investors are looking for the other factors to be increased while the money is being invested. You might have invested in your college degree which brought down your wealth, but the aim is that the more educated you become the more value you should be able to create for the world.
So, now ask yourself how can you help create more wealth for yourself, organization or country?
….And don’t forget your teachers when you are rich and famous 🙂
Of course, you can always help me increase my own wealth by joining the Webpreneur 101 courseand transferring some of your hard earned money to my good self – it may decrease your wealth in the shorter term, but I am sure the investment will payback in the longer term.