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Value, Cost, Effort, Price

Have you heard the story of Pablo Picasso and the napkin?

Picasso was at a market in Paris when someone who admired his work asked if he could quickly draw something on a paper napkin for her.

Picasso kindly agreed, created a drawing right away, and gave the napkin back to her.

And asked for $150,000 in return. (Or a million Francs in old French money.)

Shocked, the lady asked, "Why do you ask for so much? It only took you five minutes to draw this!"

"No", Picasso replied, "It took me 40 years to draw this in five minutes."

What you charge for a product isn’t equal to what it costs you to make. What you get as a salary isn’t equal to the time and effort you put into your work.

The principle surprisingly many people don’t understand is this:

The value something has isn’t equal to the effort it took to make it.

Sounds so simple — and it is. But it’s also deeply profound.

It’s the reason companies can exist. And the reason some people get paid much more for (seemingly) much less work.

Prices ≠ Cost

A product's price is what customers are willing to pay, influenced by their expected value.

My decision to purchase a pair of $300 headphones depends not on my estimation of the headphone’s production cost. It depends on whether I believe the headphones will bring enough value to me to warrant forking over the money — my value expectation.

And this expected value, in turn, is (mainly) a function of:

  • My experience with similar products
  • The experience of others with the product (think word of mouth or reviews)
  • The presentation (look & feel) of the product
  • The company’s brand image
  • In many cases: the social status associated with the product

The production cost? Largely irrelevant.

Therefore, a company can make more by spending less on production while keeping customers' value expectations the same.

The sole reason companies make profits (and thus can exist at all) is because the price of something is not equal to its cost.

Salaries ≠ Effort

If you are employed by a company, your salary results from the value you bring to the business, not the hours you work for the business.

Similarly, if you are self-employed, your income flows from the value you provide to your clients, regardless of the time it takes to deliver that value.

The business value you create stems from your impact on what the business sells and how it operates, encapsulated in this formula:

Value = What x How x Scale

  • What = the topics you work on, the skills you bring to the table
  • How = the quality of your execution
  • Scale = how many decisions, people, or processes your work impacts

Time spent is secondary.

That’s why some consultants and specialists can command obscene hourly rates, and why top executives typically make a multiple of what others at the company make (whether that’s fair or not).

And it’s also why some people don’t have to work overtime and still make more than others in similar roles who grind out 60-hour weeks.

Sure, hourly wages exist — but even these are fundamentally tied to the value you offer.

Now, of course, there are exceptions to this rule. The market isn’t efficient and neither are company salary systems.

And yet, the amount of money you will earn in the next 20 years is much more connected to the knowledge, skills, and uniqueness you offer, rather than the number of hours you work.

Invest (in yourself) accordingly.