Making money

There are thousands of businesses operating on low mark up.

These are the places selling you an item for $1.05 that they paid $1.00 for or maybe you’re paying $5.25 for an item that cost the business $5.00.

Ever wondered how they make money?money_wads

The answer is turnover.

Consider a supermarket. This is a business that people visit at least every week. Some people, like those addicted to fresh food, might visit every day.

Let’s do some maths based on a weekly turnover of items that the supermarket pays a million dollars for and sells to us with a five percent mark up.

Five precent of $1,000,000 is $50,000, so by the end of the week the supermarket has recovered the million dollars, which it uses to replenish the shelves, and put fifty thousand dollars into the account for paying costs and storing profits.

At the end of the year, after fifty-two weeks of trading, the supermarket still has the million dollars required to replenish the shelves for the next week, and it has put 52 x $50,000 into its account to cover costs and store profits.

Now, just in case you missed it – they have put $2,600,000 into that account over the year.

Even if it costs them $1,000,000 to operate the business for the year (around $20,000 a week) they have still accumulated another $1,600,000.

If they borrowed the original million dollars, the annual tax deductible borrowing cost is going to be around $50,000 at 5% per annum, given today’s low interest rate environment.

But the owners would be happy to pay 10% per annum or $100,000 if they had to, because they are making 260% per annum on the million they started with – these guys are making 5% per week on money that’s costing them 5% per annum.

imageIf you think that’s rich, think about the implications if you pay for your supermarket purchases with your credit card. Even if you clear the balance every month to avoid paying interest on the money you borrowed, the bank is still making money.

Banks charge businesses like supermarkets something called a merchant fee. Some businesses absorb the fee in their cost structure while others pass it on, which is why when you buy things online you sometimes find yourself paying a surcharge.

Point to consider is, it doesn’t matter who pays it, the bank gets its merchant fee. When you consider the billions of daily credit card transactions you can see how a low mark up of less than 1% per transaction can be multiplied into massive earnings by turnover.

Okay, you and I are not operating a supermarket or a bank. Can this work for us?

Of course it can. It’s only an operating model and it’s not a secret.

Anyone of us with a low cost item like an ebook, a training course, an mp3 music file or an App can play the turnover game, provided we can present our items to the billions of people shopping online – at a price they’re prepared to pay in exchange – and attract the attention of a small percentage of those shoppers.

What do you think businesses like Amazon, Apple and Google are doing? They’re providing us with the platforms we can use to sell our low cost items – so they can make money on our turnover. Yep, they do what the banks do. They charge us a fee that’s built into the price.

That’s what’s called a win – win.

Share this – so a few more of those billions of online shoppers get the opportunity to consider buying my lost cost items.

Thanks for dropping by, Peter.