What the opportunity in arbitrage?

Every sales opportunity involves an exchange of value between you and someone else. Ideally, you want to trade something that doesn’t have much marginal value to you, for something that has a lot of marginal value for you.

The person you’re trading with should ideally be doing the same thing. He should be trading something that doesn’t have much marginal value to him, in exchange for something with much greater marginal value.

Imagine that you have a big factory churning out widgets. What’s the marginal value to you of an additional widget? Almost zero. You want to discover ways of making that widget valuable to the person you’re selling it to. If you can’t find ways of making that widget valuable, it’s just a commodity.

The widget itself has a certain tangible value which is easy to determine. If you only focus on tangible value, you will end up discovering value mainly through price negotiation, which tends to put you on nopportunity avenue.

You can make the widget much more valuable by adding intangible value to it, in the form of useful service. You need to discover ways in which that widget – and the services you provide around it – can eliminate so much friction, and add so much value, that your customer will be willing to pay you way more than your marginal value.

In every exchange relationship, you should ideally try to create an arbitrage in which each side feels that they’re getting the better deal. That will allow you to create long term profitable relationships and mutual growth.

For example, Google creates a superb opportunity arbitrage with its users. It provides a valuable search service for free. Studies have estimated its economic value to be over $12,000 per year to users. In exchange, users provide their data for free to Google. If users tried to sell that data individually, they would earn far less than $12,000.

But by aggregating the data of billions of people, Google can use it to make billions of dollars selling advertising. It’s a perfect arbitrage. Both sides feel that they get a better deal, and Google has certainly been able to create long term value creation relationships with billions of customers, leading to mutual growth.

To create opportunity arbitrage with customers, salespeople must be focused first and foremost on how to create value for the other side. Few salespeople are focused on creating value for others, since most suffer from WIIFM (what’s in it for me) syndrome.

Most salespeople forget that they could get a much higher margin if they could massively increase the perceived value of the widget to the other side.

To do that, you must have a deep understanding of the friction suffered by your customers, and how you can create valuable solutions for them – not just sell widgets.

In any complex sale, the actual tangible widget is a small part of the package. It’s more important to design the intangible service component of the package to unlock enormous value for your customer.