Wednesday, December 29, 2010
Friday, December 24, 2010
Recently, while flipping through channels in my free time, I came upon a show called “Cupcake Girls” which combines two passions of mine - baking and business. On the surface, it seemed like another cupcake show, but just a few minutes into it, I realized that was far from the core of it. After allowing the viewers to have a peak into their business model and presenting a few scenarios with show’s accountant, I realized the show cleverly figured out a way to insert many business lessons into their every-day lives at the bakery. For anybody willing to pick up on the small details, it gave many great tips. The lesson which stuck with me most occurred in the meeting between the accountant and the ladies who ran the bakery. In the midst of some financial difficulties for the bakery, the accountant let the owners know that the more cupcakes they were selling, the more money they were losing. I was confused for a few moments, then disassociated from the show while pondering this interesting concept. I tried to understand what that meant. In that moment, I had a flashback to the business camp I took over the summer, and remember what my professor told me at Stanford. Cost is different than price. In this situation, the cost to bake a cupcake must have outweighed the price. I’ll take a moment to explain the differences.
In the consumer-seller relationship, the buyer’s focal point is on the price (how much they have to pay for the service or product-in essence, how much money goes out of their pocket) while the seller’s focal point is on the cost, the amount of money it takes to get the product to the consumer.
The price includes the money needed for the time and labor that goes behind the product. For example, when going to the store to purchase something, you actually indirectly pay for the amount it took to transport that item, the money that went behind advertising it, and some of the money needed to have a manager and employees at the store on top of manufacturing cost.
In contrast, the cost is the money needed to pay the advertisers, transport the item, and the money it took to pay the employees.
In conclusion, in this scenario, the owners of the bakery must have spent more money on the employee labor, the ovens, and the ingredients than they were making.
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Saturday, December 11, 2010
As someone who hopes someday to earn money, I look forward to depositing a modest sum every month into my bank “for some rainy day”. I will enjoy watching the money pile up (slowly) and the added benefit is that the bank actually gives me a modest “interest” for the money I deposit – currently around 1% to 2% depending upon the terms.
When I was young I always wondered “How do they just MAKE money??” and how can they afford to do that – I’m sure a LOT of people don't mind just letting their money sit there and grow !”. As it turns out, the bank not only ACCEPTS money from its depositors in exchange for interest, but it also LOANS money to some borrowers – at a considerably higher rate ! That is where the bank makes money, and that is where the bank is happy to pay you a small amount to keep your money.
A bank will loan money to individuals for many reasons – Auto Loans, Home Purchase Loans, Business Loans, etc. Each of these loans will have a rate associated with it, depending upon the amount, length, perceived risk, etc. Sometimes to reduce their risk and your rate, a bank will make a loan which is “secured” – an agreement that you will have to give up something of value if you fail to repay the loan with the terms you have agreed. Loans vary widely but can be 3% to much higher depending upon various factors.
Your previously proven ability to repay loans also is factored in when a bank determines what interest rate they will charge you as a borrower. If in the past you’ve managed your money very well, the bank will likely give you a better rate. This is where your “credit score” comes in. Your actual credit score is a number that is determined by the “credit ratings” bureaus. The three main credit ratings bureaus in the US are Experian, TransUnion, and Equifax.
It’s important to keep in mind that banks don’t keep all deposits available in cash. Typically, a bank will keep between 5% and 15% of their cash on hand for cash withdrawals. Banks have expert predictive models and software to help them determine the likelihood and amount of withdrawals at any given time.
Finally, banks do make money in other ways, including overdraft fees, checking fees, ATM fees, etc, and also in some cases issue credit cards, which can have very high interest rates !
Depositors will deposit money and get 1% - 2% for their deposits
Borrowers take loans (secured + unsecured) and pay 3% and higher (depends)
Banks base their loan rate based on risk factors and credit ratings
Banks make money with other fees (ATM, Checking) and some issue Credit Cards.
It's a complicated process, but enough banks are doing this well that it's certainly a very proven system !
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Saturday, December 4, 2010
Giving away free stuff seems to go against the main purpose of a business - to grow and make profits. It's somewhat counter-intuitive that a company could gain or benefit from giving its customers something for free. Companies have interestingly found ways to be able to give away items for what is perceived as free, but ultimately does end up costing the consumer in some way.
(1) We'll give you free stuff if you remain loyal to us.
Anybody who has ever gotten the fifth sandwich free after getting a card punched four times knows about this one. Another example is the free airline ticket after you've accumulated a certain number of airline miles.
The most ubiquitous example is probably the free cell phone you get when you sign up and promise to stay on a mobile phone plan for two years.
(2) We'll give you free stuff if you pay attention to us (advertising)
This one is a little more subtle, but Google uses this one. You get to use Google's Search engine (a service really) for free, their maps are free, and all the other products are free. Quite remarkable when you think "when was the last time I used Google products (probably daily), and when was the last time I wrote a check to Google (probably never). Also, when at a convention, have you ever stood in line waiting to talk to the booth representative, so you can get yet another cheesy water bottle that you will never use ?
The most painful example of this category is the "get a free weekend getaway and listen to us for 3 hours harp on you to buy a timeshare". OUCH.
(3) We'll give you free stuff if you try it - and please spread the word how good it is.
Some of the fast food chains gives a free food item (fries, taco, milkshake, burger, whatever) when they're launching a new item - so you can experience how good it is. Photo labs used to give away free film so you would try their film processing. The toy in the cereal box is another example. My previous blog on the grand opening of the Movie Theater was a great example of a "free trial" at a soft opening of a new business. It definitely got me to try
(4) We'll give you a chance at really good free stuff if you give us your personal data
One Word: Sweepstakes. You know them. You love them. You have entered in them, and you never won any of them. The only thing you got was more junk mail. Ha ha.
(5) We'll give you free stuff because you're famous and we want the public to think you are associated with us.
Ironically if you want to really get great free stuff, become super rich and famous. When you no longer have to worry about whether or not you can pay for stuff, it automatically becomes free (sometimes). Donald Trump once stated that he can't count the number of times he's been offered a free meal, just because the owners were happy that he came to their establishment. Donald probably paid the bill anyway, because he is a truly classy guy.
I hope someone comes up with another scheme for how to make money in a business and still give away free stuff. We all love free stuff once in a while.
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