All I Need To Know I Learned In Grade School
Lessons in Pricing & Cash Management from a Grade School Market
A few weeks ago my son Christopher’s class held a Christmas market. Each student had to decide what they were going to sell and then make/build or create the item. Things for sale ranged from Christmas decorations to Christmas cookies to jewellery. Over the course of the weeks prior the students made signs to market their products, wrote business letters to request start-up funding from parents and determined pricing as well as creating and packaging their products. It reminded me of the quote “All I really need to know I learned in kindergarten”. This blog gives some very simple examples of challenges businesses experience frequently. The simplicity of this example is what makes it so relatable. Remember it doesn’t change much as your business grows, it’s sometimes hard to see that as things get bigger and busier.
It was interesting to see the thought process that children go through when determining how to price. Some of the children intuitively understood that they needed to price their products to recover their investment plus a bit, Christopher seemed to pull a number out of the air –forgetting about the money that was spent to buy the ingredients for his chocolate mint patties and the lovely packaging from the dollar store including the candy cane toppers. So out came a blank piece of paper and a pen and we had him list all the things that went into his product:
Mini candy canes
Mini ziploc bags
Christmas themed Chinese takeout containers
Hot chocolate mix
Total Cost $28.77
Christopher determined he had 42 boxes to sell. Just to break-even on his costs he had to sell them for $0.69 each ($28.77/42 boxes). He immediately said I’ll sell them for $1. Jules asked “Why would you limit yourself to $1 per box?” We started talking about what the boxes were worth. “How do you decide that?”, he asked. That started a conversation about value -which is subjective based on the buyer’s perspective. How much would someone be willing to pay for them? We all agreed that they looked fantastic, that the packaging made them special and people would be willing to pay more than $1. We worked our way up from $1 slowly. Would they be willing to pay $1.25, $1.50, $1.75, $2.00, $2.50, $3.00, $3.50, $4.00? We all agreed that people would pay $3.00 but possibly not $4.00. At $1 if he sold all the boxes he would have sales of $42 and make $13.23 ($42 – $28.77). At $3.00 per box he would only have to sell 14 of them to make the same amount. That was a light bulb moment!
We then worked out that if he sold all the boxes at $3.00 each he would have sales of $126 in and make a profit $97.23!
I use this example to show how a change in price can have a huge impact on the bottom line- $13.23 vs. $97.23 especially once you’ve covered your costs. Unless your business model is to sell high volume at a low price it’s often worth losing some business that’s price sensitive to sell to a fewer number of customers that see your value and are willing to pay for it. In the second case you MUST deliver value and continue to deliver value if you want repeat business or those same customers will be gone very quickly.
We then discussed the opportunity to offer deals like 2 for $5.00 if people purchased multiple items and worked through the calculation to determine the least amount he could make in sales 42 boxes/2 *$5.00 = $105
The next day was the market. In preparation Christopher took $30 in change –his float to be able to give change to customers. At the market he was paired up with another student and they shared table space and signage to sell their goods. When I arrived at the end of the day he was pleased to tell me that he was completely sold out and to show me his container of money. “How much did you make?” I asked. “I have $90!”, he said. “Really?” I said, “$90.00 –did you count it?” Given that we expected he would have at a maximum $126 ($3 x 42 boxes) or a minimum $105 not to mention the $30 float he took with him something was not adding up. “Yes”, he said. “Mike (name changed to protect the innocent) and I decided to run our businesses together so we put all the money into a pot counted it and split it down the middle.” “Did Mike bring money for a float and if so how much was it?”, I asked. At first he looked at me quizzically until I started to explain the possibility that he just gave Mike half of his float. I could see the reality dawning on his face and he went running back to his business partner to ask if he had also brought a float. Two minutes later he was back and looking panicked. “Mike said he brought a float but he wasn’t sure how much it was.” “Did you write your sales down?”, I asked. ”We were supposed to but I didn’t think I needed to because I was pretty sure I’d sell everything. “ “Unfortunately,” I said “there’s no way to figure it out then. Let’s go home and we can do some calculations.”
Scenario #1 –All items sold at $3.00
42 boxes x $3.00 = $126 + Float of $30 = $156
Scenario #2 –All items sold at $2.50
42 boxes x $2.50 = $105 + Float of $30 = $135
This means that there should have been cash of between $135 and $156 in the box Christopher brought home.
What could have happened? Even if Christopher split his float with Mike he should still have $105 + $15 of $120 at the worst case. I started to ask some questions. “Did you put the cash anywhere else?”, I asked. “Well I bought a few things” he said. To figure out how much cash he really had throughout the day we started a list of things he purchased throughout the day:
Wooden Snowman $10.00
Panini for lunch 7.00
If we add this to the cash Christopher brought home he really had $118 ($90+$28) before he used some of the money to buy things. Based on our two scenarios above he was short at least $17 ($118-$135) if he sold all of his items at $2.50 each. He thought he likely sold more items for $3.00 than $2.50 so at most he was short $38 ($118-$156 scenario #2). The interesting part is that it was a significant loss for Christopher and he felt it. I only wish I could give clients the same feeling for under $50! In the end it was a great lesson in how to handle cash that cost less than $50.
The morals of the story:
Price based on value –what the market will bear but make sure you cover your costs
- Make sure you keep track of your sales
- Count your float daily and remember to adjust your daily figures for the float amount
- Reconcile your sales and float daily with the cash you have on hand at the end of the day
- Keep track of items you pay for in cash from you daily sales
- Make sure you know who you are going into business with and determine how you are going to distribute the profit upfront!