The Candy Man Earns 500% Profit
There’s a story that I’m fond of telling about my early experiences of being an entrepreneur. It’s filled with unfairness, flying under the radar, gumption, glee, and a sudden end to the golden times. Let’s begin!
My parents believed in a relatively small “salary” for completing chores around the house. So in exchange for doing things such as setting the table, vacuuming, and keeping my room clean, I received $2 per week in spending money. Contrast this to others in my 4th grade class who had parents that gave them $20 per week! I didn’t think this was fair, and so I set out to alter the balance more in my favor.
My mom shopped at three stores each week and purchased different staples at each depending on the coupons du jour (she was an extremely fiscally responsible women for which I admire her greatly). One of those three was our local family fare store and they stocked this wonderful candy known as Zotz Fizzy Candies. We just called them fizz candies. They were sold in individual packages but each package was loosely attached to 4 other pieces. Each individual piece was $0.02. After trying these a few times on my trips to get groceries with my mom, I hatched a plan and solicited my mom’s help: each week I would have her take my $2.00 to the store to purchase 20 “strings” of 100 individual pieces of fizz candy.
I would take those 100 pieces of candy and during afternoon recess, I would offer them to my fellow classmates for $0.10/piece. That’s clearly not a lot of money, but a 500% profit margin isn’t a bad days work. Plus, not a lot of people walk around with dimes in their pocket, so typically the minimum quantity sold was 5 with most people just paying a dollar for 10.
Business was booming: my classmates a la my customers were happy, and I was quite enjoying my larger weekly spending money. But then the Vice Principal intervened. While he didn’t crack down on me specifically it was made known throughout my elementary school that students were no longer allowed to buy and sell things to one another during school hour or on school grounds. So not only did I learn the power of supply and demand, I also learned that I should have cut in my vice principal on the deal so as to allow it to continue.
The last lesson I learned was that of scale; I experimented a few times with taking my retained earnings from the previous week and having my mom buy more than 100 fizz candies. It did work…up to a point. I found that I could only sell around 200 pieces in any given week (there are only 5 school days a week, and a 20 minute afternoon recess where one’s transactions have to be conducted in secret wasn’t that much time). Any more than 200 and I had excess inventory on my hand.
So 500% is a fantastic rate of return…but it only worked on a very small amount of money. This type of analysis is done all the time on “real” types of investments. There are two things to consider:
- Your temporal discounting rate: the rate at which you value things now vs. the future. So if I told you that I would give you $100 one year from today, how much would that be worth to you today? For me personally, that would be worth about $80. But it varies based on the preferences of the individual, things like inflation, interest rates, and opportunity costs. Also interestingly enough, research suggests that on small amounts of money our temporal discounting rate is higher. That means that while I may only pay $80 in order to get $100 one year from now, I’d be willing to pay more than $800K to get $1M a year from now. That makes sense to me!
- What your next best return is: so each week I turned $2 into $10. If I were able to continue with that pattern and reinvest all my earnings into the next week’s supply of fizz candies by week 8 I would have $156,250. By week 10 I would have been almost at $4 million and it increases in absurdity from there. Clearly there’s no way kids at an elementary school have that kind of extra cash to throw around on candy. So instead I had to consider what my next best return was. And at the time, that was peanuts (maybe 1-2% if that) at my local Ottawa Savings Bank.
Overall, it was a great experience and it piqued my interest in figuring out how to provide people with things that they wanted when they wanted them! If you can figure out how to make others really happy, there’s likely a profit in it for you too!