The #1 Way To Increase Profits
Summary
- Arbitrage is about taking advantage of price differences in different markets; you buy low in one market and sell high in another.
- This concept applies to all businesses; whether you're dealing with products, labor, or services, profitability is based on the arbitrage opportunity present.
- It's essential to understand the distinction between accounting and economic profits. Accounting profits are your revenues minus all costs, while economic profits consider opportunity costs – potential earnings from alternative uses of your resources.
- As an entrepreneur, I'm constantly evaluating which business opportunities offer the most significant arbitrage potential given my team's skills, resources, and talents.
- It's crucial to identify markets with high growth potential because they're likely to offer better arbitrage opportunities due to increasing demand.
- Evaluating what we could be the best in the world at helps narrow down the most promising arbitrage opportunities for our businesses.
- Whatever service or product we provide should not have its price dictated by the cost to us, but rather by what the market will bear.
- Successful businesses exploit information advantages and the large disparities between production costs and market value.
- We shouldn't feel ethically constrained by how much we mark up our products or services, as long as the market supports the prices we set.
- Finding the right arbitrage opportunities that align with our capabilities enables us to maximize long-term growth and profitability.
Video
How To Take Action
I would suggest starting by understanding arbitrage deeply. Think about how you can buy something low in one market and sell high in another. Look around you; there are often price differences waiting for you to capitalize on. Remember, it's not just about products. This applies to labor and services too.
Next, focus on distinguishing between accounting and economic profits. Remember, the real profit is what you have after considering the money you could've made doing something else with your resources. Think about your skills, the time you have, and how best to use them.
If I were you, I'd evaluate my current business or idea against potential arbitrage opportunities. Ask yourself, which of these can you be the best in the world at? Where are your talents and resources most valuable?
To identify high-value opportunities, look for markets with high growth potential. They often have more demand, meaning you can buy cheaper and sell for more.
Think about pricing too. Don't just set prices based on what it costs you. Instead, price based on what people are willing to pay. Sometimes, you'll make something for a little and sell it for a lot. That's okay as long as the market supports that price.
Last, align your findings with your capabilities. Choose the arbitrage opportunity that fits best with what you can do. This alignment will help you grow and be profitable in the long term.
So remember:
- Learn about arbitrage and find it around you.
- Choose opportunities where your resources and skills shine.
- Target growing markets for more significant arbitrage potential.
- Price based on market demand, not just cost.
- Align opportunities with your capabilities for long-term success.
By doing these things, you're positioning yourself to make the most of what you have. Good luck out there!
Quotes by Alex Hormozi
"Arbitrage is where you buy in one market at one cost and then you sell in another market at another cost"
– Alex Hormozi
"The extent to which you crush it will be dictated by how big the arbitrage is"
– Alex Hormozi
"Every business fundamentally works this way"
– Alex Hormozi
"Accounting profits are revenues minus all costs"
– Alex Hormozi
"The price that you charge should never be in any way relation to what it costs you and only related to what the market will allow"
– Alex Hormozi
Full Transcript
talking to you about my fa one of my favorite topics um arbitrage and so the first time i heard this word uh was actually in a fancy dinner i was sitting at and i was like i don't know what's going on and these dudes in finance were talking about derivatives and crazy stuff right they just kept saying arbitrage and i was like what is it you know like like finally i was like what does that mean um and they were like oh it's like when you just take advantage of an inefficiency in a marketplace and i was like how and so then they explained it to me and they're like well it's sort of like when you go on ebay right and you can buy something for five dollars and then you can take the same thing and then just go into amazon and sell it for fifty dollars well that would be a big example but you get the idea where you buy for five and you sell for 50 and it's because there's an inefficiency in a marketplace where there's that's where the arbitrage happens right and so the definition of arbitrage is where you buy in one market right at one cost and then you sell in another market at another cost so you sell high and you buy low pretty simple right everyone understands that that makes shakes that should make sense and here's you in the middle making all your money being happy yeah there's you all right so that is basically what arbitrage means but the more i thought about this concept the more i realized that all businesses arbitrage and how much money you make and the extent to which you you you crush it will be dictated by how big the arbitrage is right even if you think about basic business a service business you're buying labor in the labor market this is market one this is why this is important is that you're buying and selling between different markets all right this was a point of nuance that i didn't understand when they first told me how this worked and i also didn't want to ask because i was embarrassed that i didn't know what i mean so hopefully you can watch this and not be embarrassed if someone says it all right so market one and market two so there's an inefficiency this little line here is the inefficiency between the marketplace what you're buying it when you're selling it right right and so market one can be a labor market you're buying labor at x price and you know that you can sell the labor at another price to market too right and then that's how you make a profit but every business fundamentally works this way i can buy from a manufacturer for a dollar and sell it over to market or market number two for five dollars right now and even the manufacturer buys from raw ingredient producers who buy it from farmers at one dollar and sell it for five dollars right and so that's the game that continue gets played between market one and market two and a a supply chain is literally a series of markets in a row of markets buying and selling buying and selling and buying and selling and then the person in the middle the business owner is technically arbitraging all of these things right right okay now here's where i think this is interesting there are two so take this concept pocket it in your mind for a second and so one of the concepts that i've tried to explain um and i'm i'm partially making this video so that i can i know that i learn things better when i teach them all right so is the difference between economic profits and accounting profits if anyone took economics if you did right then they would talk about this and the difference i'll start with accounting profits because it's it's the easier one to understand they're not hard to understand but it's the easier one all right so economic profits first accounting accounting profits are revenues minus all costs right that is an accounting profit right that's what most of us do when we do our tax returns that is an accounting profit simple everyone should understand that one an economic profit is where you take the revenue minus the explicit cost of doing business and then you also subtract out the opportunity cost which is the implicit cost of using the resources that you have in that particular market or path versus another opportunity so let me give you an example so let's say uh you own a paper mill right and your company owned a forest and that's where they cut the trees down and then they turned it into paper right simple now the economic profits of that business the opportunity cost that would be factored into that economic profit is whether or not you could make more money just selling timber right or selling sawdust or selling wood those would be different examples of things that you could do with the existing resources you have which is this guy in the middle here he's got resources he's got people he's got maybe equipment skill sets talent etc that if he were to apply those skills to a different market he could then make more money and that is the difference between economic profits and accounting profits and the reason this is important to me as an entrepreneur is that when i'm looking at what i want to get into right with what things are interesting to me or for investing because i invest in businesses now which is kind of wild to me um but anyways is that i'm looking is this given these resources of humans and skills and and equipment and software and everything we're currently pursuing arbitrage opportunity a right but what if with these same skills i could have arbitrage opportunity b where i'm buying in this market for rock bottom prices and there's another market over here that is paying top dollar right so between the first example i have where it's a it's a normal amount of money that's being made compared to this arbitrage opportunity i would want to be in this one right now what's going to dictate whether or not it's going to be one of these markets versus one of these markets well the growth of the marketplace overall there are growing markets like online fitness is a growing market right and so it means that there's likely going to be arbitrage a greater degree of arbitrage because there's going to be more demand and so if i can find markets where i feel like there's more demand for the same things that i can buy cheaply then i want to go to those things and so when i'm thinking about all opportunities because i think that that's one of the biggest superpowers that we have to have as entrepreneurs is not sure like right now i could go and run a gym and make money i could i could also run a massage parlor and make money i could also run a supplement company make money i do that too right i could run a lot of different businesses to make money but of all the opportunities under the sun of all the different ways i could make money which is the best given my resources skills talent team etc and then if i look at all of those things on a board these are the things that we're absolutely amazing at and these are the different arbitrage opportunities that exist which of these arbitrage opportunities will be best fit for the skills talents traits team etc that i have and then by answering that question we'll inherently answer the very important question which is what can we be the best in the world at and so i think for me this has been a really valuable concept to understand is that all businesses arbitrage it all functions off of an information advantage between the buyer and the seller the bot sorry the seller always has the information advantage or many times has the information advantage and so fundamentally when you find out that an iphone cost 17 to make people are shocked by this but that's because there's obviously other costs besides the manufacturing obviously but all big businesses run off of extraordinary degrees of arbitrage right facebook is able to have eyeballs and sell eyeballs at a significant amount cheaper than it costs them to manufacture them right right uh verizon it costs them pennies to add another user to their base and so the reason this is important for me to at least express is that for a very long time when i was when i was earlier on in my career i had these weird morals and ethics around how much more i could charge for something and the reality is there is no limit it is simply based on the market demand and so whether it costs you a penny to make something that's worth a thousand dollars or cost you a penny to make something worth two pennies that price that you charge should never be in any way relation to what it costs you and only related to what the market will allow and then it's up to us as entrepreneurs to look at which arbitrage opportunities exist between marketplaces that best fit our skill sets and by doing that we will then find ourselves in the best opportunity vehicle for us to grow in the long term and probably make the most money so anyways i hope that was valuable for you i hope this made sense for me this is a topic that i love talking about um and i hope that you find value in that um and otherwise have an amazing day i'm rooting for you keeping awesome leave a like comment review or to your subscription or subscribe or tap the button or all the stuff keeping awesome catch you soon bye [Music] [Music] [Applause] you
