One of my earliest experiences with entrepreneurship revolved around candy. It’s a story filled with unfairness, flying under the radar, gumption, glee, and a sudden end to the golden times.
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, so I set out to alter the balance to be more in my favor.
My mom was fiscally conservative, so she shopped the sales at three stores each week. One of those three was our local Family Fare store, and they stocked this wonderful candy known as fizzy candies. They were sold in individual packages, but each package was connected in groups of 5. Each piece was $0.02. After trying these myself a few times on my grocery trips with my mom, I hatched a plan and solicited my mom’s help. Each week, I would have her take my $2.00 allowance and purchase twenty 5-string packages comprising 100 individual pieces.
I would then take those 100 pieces of candy and offer them to my classmates during afternoon recess…for $0.10/piece. That’s not a lot of money, but a 500% profit margin isn’t a bad day’s work. Plus, not many people walked around with dimes in their pocket, so typically the minimum quantity sold was 5, with most people just paying a dollar for 10.
The business was booming: my classmates/customers were happy, and I was 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 hours or on school grounds. So not only did I learn the power of supply and demand, but I also learned that I should have cut in my vice principal on the deal to grease the wheel.
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 fizzy candies. It did work, but only 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 much time for commerce. Any more than 200 and I ended the week with unsold excess inventory.
So 500% is a fantastic rate of return. But it only worked with 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. in 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, that would be worth about $90. But it varies based on the preferences of the individual, 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 $90 in order to get $100 one year from now, I’d be willing to pay more than $900K to get $1M a year from now.
- What is your next best return (the opportunity cost of your money)? Each week, I turned $2 into $10. If I could continue that pattern and reinvest all my earnings into the next week’s supply of fizzy candies, by week 8, I would have $156,250. By week 10, I would have been close to $4 million, and it increases in absurdity from there. 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. At the time, that was peanuts (maybe 1% if that) at my local Ottawa Savings Bank (Fifth Third bought them out in 2000).
Overall, it was a great experience and piqued my interest in figuring out how to provide people with things they want when and where they want them! If you can figure out how to make others happy, you’re creating value, and there’s likely a profit in it for you!