Now, I don’t consider myself a master of business and economics. But, people usually come up to me and ask for advice pertaining to business all the time, and they usually come back for more which means I must be doing something right. I’m writing this series of posts to provide insight on the basics of economics and business. A lot of people are in business school, and are having a tough time grasping concepts. This could be because of the professor or the student, I don’t know and honestly I don’t care. I’m just doing this too help people out. If you know all this of this stuff by heart, like I do, then don’t read. Go out and implement your skills like I have. Also, if you don’t my style of explaining things, then don’t read my posts. Products are designed for specific people; so don’t use anything that doesn’t provide use for you.
Ok, so you want to start a business or say your learning about business. Chances are you have heard of the supply and demand, and middleman. If you haven’t, supply is the product, demand is the need for the product, and the middleman is relay between supplier and consumer. As supply builds, demand usually must be going down. And as demand builds, supply usually goes down. To profit effectively, one must keep the supply and demand relatively equal, no major excess product. Now that sounds pretty simple…right? Wrong. If you think that the concept of supply and demand is simple, then your probably not going deep enough.
By deep enough, I mean considering the factors that fuel the shifts in supply and demand. There are almost an unlimited number of factors that could affect the supply and demand of a business’s product; some could bring very little effect, think a pebble and a window, while other factors could affect things quite drastically, think sledgehammer and window. Some examples of factors include but are not limited too: natural disasters, medical break troughs, acts of terror, a new menu item, and conspiracy. Also, a middleman could also be a factor that influences supply and demand.
Now, I could provide you with a simple, generic, and mundane real-life example, like a convenience store or a tech start-up. But, you’re probably either sick of these examples, or clue-less because you slept through the lecture when these examples were being used. So to keep you attentions, I’m going to use a subject that is exciting, refreshing, and quite successful (and very illegal). Most of my examples will be about drug dealing, specifically heroin. (Note: I do not condone the use, production, or distribution of heroin. It’s a very dangerous substance, and will get you in trouble. I don’t do heroin (or any drug to be clear) The thing is, kids these days are so “numbed” down, in the sense that things like tech and legitimate business doesn’t keep their attention as it used to. Things like drugs, theft, and prostitution not only get their attention, but also provide them with something that will be memorable).
Mr. Smith acquires his product, in bulk, from distributors (middleman). Their product isn’t always the best, and it’s definitely not that cheap, say around $50,000 per kilo. With this already diluted product, Mr. Smith must then further dilute it to where it’s crap quality. Mr. Smith will be able to then sell this powder for about $75,000-$80,000 a kilo. After all other expenses are considered, Mr. Smith will probably net around $5,000-$7,500 per kilo. Not bad, but that’s only around a 10%-15% return on the original $50,000 investment. Not really worth the trouble when you consider it.
Now lets say Mr. Smith went to Southeast Asia for a vacation, and just so happened to stumble upon a heroin operation. The product is almost pure, compared to the diluted product he deals with back home. Also, there is also large supply of the product, and low demand in Southeast Asia. In short, it’s cost Mr. Smith around $10,000 a kilo once he gets it to the states. This includes the original cost, shipping and bribing, as well as the processing once back home. Now, say Mr. Smith wants to differentiate his product from the rest of the crowd. Instead of a 2%-3% concentration, Mr. Smith lovingly gives his consumers pure, unadulterated heroin at the same price as the crap stuff. So he invests around $10,000 a key, sells for around $75,000-$80,000, and also builds brand loyalty (I’ll touch on that in future posts). After considering other costs, Mr. Smith would net around $40,000-$50,000 per key. That’s around a 400%-500% return on investment. Still not worth the trouble, but definitely better than 15%.
Ok, so how did Mr. Smith raise his return percentage? Well, Mr. Smith probably listened in during the lectures, or probably graduated from the streets. Simply put, he exploited the supply chain, cut the middleman, and provided the consumer a better product at a similar price. By cutting the middleman, Mr. Smith was able to reduce his initial operating cost drastically, which led to a higher net return. So how can you use this in your own ventures? Well for starters, having a product that sells help. Once you have that, find a supplier or middleman if you don’t know where to get the product or do not have the resources to get it yourself. This doesn’t necessarily mean a wholesaler; a middleman could be a manufacture too. With middleman, you can build your name and product. Once you have a stable consumer base, then it’s time to consider cutting the middleman. Start searching for the manufacturer, or start manufacturing yourself! And finally, make sure the product retains or improves upon its value and quality. This will not only lead to growth, but also loyalty from the consumers. I will touch on those two subjects and more on my next posts.