The rich buy low, add value and sell high
Picture a sleepy tourist spot at a coastal town. Somewhere between Umhlanga and Umhloti, the village of Umdreamy is a beautiful little seaside community, replete with palm trees bending lazily in the salty sea breeze and tanned foreigners lazing the days away.
A woman is born into the village where, for generations, the locals have made a basic income in a very simple way. A unique fruit grows near their village of Umdreamy: the delicious, juicy and citrusy guavadilla. Guavadillas are gorgeous: beautiful to look at and sweet to eat.
The woman born into the village, Miriam, starts selling guavadillas at the roadside. She makes money because she can pick a guavadilla for free and sell it, which means that her costs are very low. Unfortunately, she can’t sell them for very much. Guavadillas are delicious, but they’re not terribly valuable simply sold by the roadside.
Miriam sees something interesting on TV. In a travel show about a tropical island, she notices that the islanders are carving coconuts into interesting designs, then filling the carved shells with alcohol and selling the finished product to tourists on the beach. For a hefty price.
Miriam copies the idea, applying it to guavadillas. She carves an exotic shape into the outer skin, turning the guavadilla into a natural bowl. She then pours a combination of relatively cheap vodka and orange juice into the bowl.
The guavadilla was free. The labour cost her nothing. The vodka and orange juice were cheap too. But add them all together, and Miriam can charge a greatly increased amount for the total package – almost five times more than she charged for the guavadilla alone. She has added value through creativity and the addition of extra ingredients. She bought low, added value and sold high.
But now it occurs to Miriam that that there are extra ways to grow her wealth. What if she bought up all the competing businesses? The competing businesses are five other women who sit on blankets beside the road, selling guavadillas.
Miriam ‘buys up their businesses’ by offering them jobs, thus reducing competition. They come to work for her, and now Miriam has a small company of people, each of whom is collecting guavadillas at a low cost, adding value to them, and selling them at an increased cost.
The principle is working, but Miriam quickly realises that her buying market (local tourists at that spot) is too small. If she could transport these delicious, alcoholic guavadillas to the next town, and the one after that, she would greatly increase her reach and, consequently, her profits, by transcending the limitations of her local market.
She sources a cheap way to do that. There is a teen with a bicycle who is looking for work. Miriam pays him to transport guavadillas to the surrounding towns, where she hires more people to sell them, scaling up her business.
In each new transaction, provided Miriam can keep her costs relatively low, she is adding value to her product by:
- improving on its original state;
- adding more components to it; and
- transporting it to a place where it was previously unavailable.
As guavadillas catch on in popularity, Miriam realises that her packaging still looks fairly basic. She sources a local carpenter to build small but attractive wooden shacks, with nice branding, from which to sell her guavadillas. She adds signage and attractive uniforms for her employees. This, again, raises perceptions of her product, resulting in more sales and the ability to keep her prices at a healthy premium.
The rich understand the principle of buying low, adding value and selling high. This basic principle applies to almost anything, from the humble guavadilla to a massive oil refinery. The lower the cost at which you can buy the things you need, and the more value you can add to them, the more you can sell them for afterwards. Think of it as a negotiation at two ends. You negotiate the most favourable (cheap) price when you buy. You make it better. You negotiate the most favourable (expensive) price when you sell.
Robert Kiyosaki said, ‘It’s more important to grow your income than cut your expenses. It is more important to grow your dreams than cut your spirit.’ By understanding this principle, Miriam is able to take the simple process of guavadilla-selling and scale it up into a revenue-generating machine.
Poverty mindset: This isn’t worth much.
Wealth mindset: How do I ensure that this becomes worth more?
Douglas Kruger is a business author and professional speaker. See him in action, or read his articles, at www.douglaskruger.co.za. Douglas’s books, including ‘Is Your Thinking Keeping You Poor? 50 Ways the Rich Think Differently,’ are available at Exclusive Books, Estoril, CNA, and as ebooks from Amazon.com