Iron Law of Economic Survival

My favorite mental model from the book The Rebel Allocator¹ is the idea of “The Iron Law of Economic Survival” which is a triangle composed of 3 edges: Cost, Price, and Value. For any business to be successful, Price must be greater than cost, and Value is everything “extra” the customer gets beyond Price, eg Brand value.

Everything in Blue is brand value. Think Costco. Customers are incredibly loyal because Costco pushes the Price edge as far to the left as it can. As a result, Customers trust that they will always get the best prices and therefore choose to only shop at Costco. In other words, the value they get from shopping at Costco, far exceeds the prices they pay. Value exists in the customers’ mind.

I love it because of how simplistic and reductive it is, but there is tremendous nuance “between the lines”. Similar to a supply and demand curve, the numbers themselves don’t really matter, just thinking through different scenarios with these principles in mind will get you 80% of the way there.