I feel like I’ve had conversations like this with people before. From Giant in the Playground:
(HT to Jonatan Krovitsky)
Dear world: if you want to run a profitable business, you have to focus on, well, profit. And, by the way, revenue and profit are not the same thing…and, no, units sold and profit are not the same thing either. (If this were true, it would always be an optimal strategy to give away your product for free or even pay people to take your product, right?) I remember going into a Dunkin Donuts a couple of years ago and seeing a sign that said something along the lines of “we apologize, but we have to raise prices to make up for lost sales due to the bad economy.” I think it was only the fact that I was hungover that prevented me from pointing out to the cashier that her employer was totally doing it wrong. In case you’ve forgotten:
In related news, I have finally fully gotten over my long-standing distaste for The Big Bang Theory- I think it has something to do with the fact that the show had Danica McKellar on one episode and now has Mayim Bialik as a recurring character. (Yep, Blossom both has a Ph.D. in neuroscience and plays one on TV. And yes, I realize that the show is totally pandering to people like me, but I’ll take it.) As such, I was watching an episode the other day that teaches an important lesson about productivity and economic profit:
Penny: Yeah, yeah, yeah, yeah. Look, look, look! I started a business.
Sheldon: Obviously, not a cleaning business.
Penny: No, I’m making flower barrettes. See? I call them Penny Blossoms. I made one for myself, then all the girls at work wanted one. Then I showed some to this lady who runs a shop in Old Town. She sells cards and homemade jewellery. She said she wanted to sell them. I said okay, and in one week, I made a $156.
Sheldon: Good for you. Sign here.
Penny: Sheldon, don’t you get it? If this takes off, I won’t have to be a waitress anymore.
Penny: So, what do you think? I mean, this could be a business, right?
Sheldon: How many of these can you make a day?
Penny: About twenty.
Sheldon: And how much profit do you make per Penny Blossom?
Penny: I don’t know, like, 50 cents. I’m not sure.
Sheldon: No, Of course you’re not. All right, ten dollars a day times five days a week times 52 weeks a year is two thousand six hundred dollars.
Penny: That’s all?
Sheldon: Before taxes.
Scene: Penny’s apartment. Penny is making a barette. Sheldon is timing her.
Penny: There. Done.
Sheldon: All right. 12 minutes and 17 seconds.
Penny: Pretty good, right?
Sheldon: That’s 4.9 Penny Blossoms per hour. Based on your cost of materials and your wholesale selling price, you’ll effectively be paying yourself… $5.19 a day.
Penny: A day?
Sheldon: There are children in a sneaker factory in Indonesia who outearn you.
Leonard: I can’t believe we actually did it.
Howard: 1,000 friggin’ Penny Blossoms.
Penny: I just want you guys to know I am really grateful for your help, and for every dollar I make, I’m going to give you 20 cents.
Howard: That’s your entire profit margin.
Penny: Oh. Then never mind.
I would like to take this opportunity to remind everyone of the difference between accounting profit and economic profit. Accounting profit is simple- dollars in minus dollars out. In this case, Penny at least has an accounting profit since she is selling the penny blossoms for more than it cost her to make them. Economic profit, on the other hand, is a different story, since economic profit factors in opportunity cost. If Penny makes, say, $30,000 per year as a waitress, then she has an opportunity cost of $30,000 if she decides to quit her job to make penny blossoms. Given this, she is not likely to make an economic profit unless she becomes much more productive, since her $2,600 of accounting profit isn’t enough to cover her opportunity cost as well.
This is a good example of why economic profit rather than accounting profit is the right quantity to consider when making business decisions. When I see things like this, I can’t help but think of a friend of mine from high school who quit her job to open an Etsy store, among other things. (And yes, when I visited her last year, I did ask lots of questions of the “how long does it take you to make this stuff?” variety.) Luckily, The Big Bang Theory appears to have been somewhat educational for this demographic:
I kept thinking of Etsy and all the small shop owners here. Penny was quite excited that the girls where she works wanted some of her clips and a lady with a boutique wanted to carry them. “I made $156 this week, Sheldon!” “If this really takes off I won’t have to be a waitress all my life.”
Sound familiar? I know I daydream about my shop taking off to full time income status. Sheldon had to be the voice of reason though. “Penny, how much do you make on each Penny Blossom?” Her reply, “I dunno.” “Of course you don’t.” Now, Sheldon is a physicist and is all about hard numbers, but this conversation was one I’ve seen many times on the forums here.
It’s hard to know if you can make a living until you figure out your production time, profit per piece, and workable hours per week/month/year.
As the show progressed the techie friends had built Penny a storefront online (I’m thinking “Go to Etsy!”) and then the real trouble began. A huge order of 1000 Penny Blossoms…. with a 1 day rush service. Rut roh!
The Penny Blossoms did get done with the help of friends, refined manufacturing process to significantly reduce production time, work chanting songs, and coffee.
I know it was just a sitcom, but I highly recommend it to all Etsy sellers. Very funny and actually hit on a lot of the issues we all face here, especially when starting up or trying to take our shops to the next level.
Hope I wasn’t the only one who saw it and though immediately of my own Etsy shop.
As your humble blogger, I would like to be the pot rather than the kettle, thanks.