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.

Conscious capitalism

coinsCapitalism gets a bad wrap in some sections of the media. To be honest, the behaviour of some corporations and individuals in the business world leaves a lot to be desired. It doesn’t take much research to uncover examples of exploitative or unethical practices.

Most of us have probably heard or read stories of investor fraud and falsified accounting. If you need a reminder do a Google search on Enron.

If you want an insight into unsavory business practices, invest some time reading Fast Food Nation: The Dark Side of the All-American Meal by Eric Schlosser. Be warned – you might not want to eat burgers after reading!

Despite all the errors, greed and bad judgements of the operators of the business world, the free enterprise capitalist model has a lot going for it. But, according to John Mackey and Raj Sisodia in Conscious Capitalism, it needs a heart transplant if it is to live up to its potential.

In their book, Mackey and Sisodia name four interconnected and mutually reinforcing tenets of conscious capitalism: higher purpose, stakeholder integration, conscious leadership and conscious culture and management.  Not the sort of terminology you usually encounter in business books.

This is the most encouraging book on capitalism and the way business could operate that I’ve come across. According to the authors, there is a growing number of businesses embracing the conscious capitalism model; their identities may surprise you.

If you’re interested in gaining an insight into the world of business, I recommend the book and suggest you take a look at the Conscious Capitalism website, where you can review an overview of their concepts. Yes, they have a buy the book link.

I have no association with the authors or their website apart from owning a copy of their book and being aware of their website. I simply like the concept of conscious capitalism – it’s another expression of conscious living.

Thanks for dropping by, Peter.