Watermelon Barons - Part III
In episodes I and II, we saw Bubba and Goober's attempt to become watermelon barons turn into unexpected losses. Fortunately, their wise Uncle Frank treated them to some homegrown business lessons that, if they've learned the lessons, could put them on the right track. When we last visited with the two brothers, they were about to dig into their mom's fresh peach cobbler. Let's eavesdrop as Uncle Frank serves up a side dish of business advice as well . . .
“Mmmm! This is some fine peach cobbler!” Uncle Frank exclaimed. “No wonder I had you for a sister!”
But as good as the cobbler was, Frank's real passion was to teach his nephews about business. As soon as he had put away a few bites of that tasty cobbler, he launched into his next lesson. “So, today you sold all those melons for a buck a piece and ended up losing $20. What are you going to do about it?”
“Charge more” chimed in Bubba and Goober.
“How much then?” asked Frank.
“$3.40 each,” they replied.
“Now, hold on just a minute,” fired back Frank. “I thought it was going to cost you $3.40 each for those melons. Aren't you going to earn a profit? You're in business, right? Aren't businesses entitled to profits?”
“Well,” Bubba spoke up, “We figured that each of us would earn a hundred apiece, so we didn't need to earn a profit.”
“Oh, so you're back to competing with the Salvation Army again?” Frank continued, “What if you were paying someone to run the melon stand? Then, they'd get all the money and you'd still be left holding an empty sack. If there's no profit, then you don't have much of a business.”
“Well, let's see here,” Goober mused, “If we add 25 percent profit, we'd be selling these things for $4.25 each because 3.40 times 1.25 equals 4.25.”
Peaches spewed across the table as Frank exploded. “That's not a 25 percent profit! Didn't you learn anything in that 14 years of schooling at taxpayer expense?”
Frank sighed when he saw the puzzled look on their faces. It was time for a quick math lesson:
“If you add 25 percent, you get a selling price of $4.25. But that doesn't give you a 25 percent profit. Here's the formula for figuring out how much profit you would make by adding 25 percent: 3.40 (your cost) divided by 4.25 (selling price) equals 0.80. 100 (as in 100 percent) minus 80 (as in 80 percent) equals 20. If you sell for $4.25, you're only making 20 percent profit, not 25 percent like you thought.”
The brothers nodded their heads, “Uh, so what if we want to make 25 percent?” Goober asked.
“Glad you asked,” Uncle Frank said with a grin. “Because I was going to tell you anyway. To get a 25 percent profit, first you subtract your desired profit margin (25 percent of the selling price) from 100 percent (which is whatever the selling price will be). It will look like this: 3.40 divided by 0.75 (which is 100 percent minus 25 percent). What do you get?”
Bubba clicked on his 1974 model Texas Instruments handheld calculator and punched in the numbers.
“$4.53. Say, that's quite a bit more!” exclaimed Bubba. “If we sold a hundred melons at $4.25 we'd make - let's see here - $425, which is only a 20 percent profit. But if we sold a hundred melons at a 25 percent profit, then they would sell for $4.53, which would be $453, which is $28 more. That's a big difference!”
“Now you're thinking,” smiled Frank. “But $4.53 sure is a weird number. What if you charged $4.75?”
Goober blurted out,” Nobody would buy 'em!”
“Wrong answer! Go back to eating your cobbler,” barked Frank.
“But,” Goober continued, “today we sold them at a buck apiece and now you're saying we have to sell them for $4.75? Why would anybody pay that much?”
“Think about it. And I know it's hard for you,” Frank began. “You said the melons at the A&P taste like overgrown cucumbers for a buck fifty each. You also said that since you pick your own melons, you harvest only the best ones. Which is the better deal: a buck fifty for a melon that's a chore to eat or $4.75 for select prime Grade 'A' delicious extra sweet melons backed with a money back guarantee if they don't tickle your tummy?”
Bubba suddenly got concerned, “Money back guarantee? You mean I'd have to give back $4.75, if they didn't like a melon?”
“That's right. And it may happen once or twice so do it with a smile,” Frank continued. “But you're missing the point. If I'm going to spend money on a melon, I'd rather pay more for one that's worth eating instead of paying less for one that would end up in the hog trough. I can get hog feed for a lot cheaper than a buck fifty.”
“I dunno about that,” Goober replied, “But you know what? You're a lot smarter than me, so I'm going to take you at your word. What's the worst thing that could happen? Maybe we'd end up selling only 50 melons or so, but even then we'd make more money than we did today.”
The Next DayAnd sure enough, the next morning they were out in the melon patch picking the finest melons the farmer had. Soon, Bubba and Goober had their melon truck on the roadside, with a new sign and a vendor's permit ahead of time.
During the day, a few of their repeat customers fussed about the new price, but since they knew how good the melons were, they paid the new price. Not as many people were buying five or three at a time as before. But by the end of the day, the brothers were amazed to find that they had once again sold all 100 melons. After paying themselves a hundred bucks apiece, and paying all the other expenses, they still had $135 in profits left over. A 28 percent profit!
“Wow!” said Bubba.
“Golly!” said Goober.
“That was fun!” they said in unison.
About a month later, Uncle Frank dropped in on the boys to see how business was going.
“We're having so much fun!” they laughed. “People kept on buying them melons, even though they were so high. The A&P even cut their melon prices down to 89 cents because ours were so much better nobody was buying theirs. We took the profits we were making and bought a trailer for the truck. Since we pay cash, the farmer let's us have 225 melons for only $200, so we park the trailer on one side of town and the truck on the other. We even hired a couple of high school kids to help out.”
Frank beamed broadly as he slapped his nephews on the back. “The watermelon business is a lot more fun when you make a profit, isn't it?”
“It sure is!” they chorused.
Now, it's time for a reality check. Not every business is going to experience a “rags to riches” story like our watermelon barons. But one thing is for sure: It is no fun if you don't make a profit. Many PHC contractors fail because they are committed to high quality, but just don't charge enough to be profitable. Other contractors shave quality in order to keep their prices low. But how many corners can be cut before you end up offering “overgrown cucumbers?”
Look at your business. Examine your product. Are you offering satisfaction, peace of mind, quality workmanship? Are your low prices keeping you from offering better guarantees? Do low prices keep you from earning the profits you deserve for your skills and hard work? If so, then tally up the true cost of delivering the service you offer. Include your compensation as part of the cost. Figure a profit into your selling price. Then find out how much more fun it is to be in a business where satisfying customers and earning a profit is the game.