Monday, June 28, 2010

Lessons Learned from a Lemonade Stand

As my children split the earnings from their first lemonade stand just a few days ago, I couldn't help but take the opportunity to teach them a little about entrepreneurship.  Here is their grade in 5 critical areas of running a business, with some application for all business owners and entrepreneurs to consider:

Not only was it a sunny and hot Saturday afternoon, but several people in the neighborhood (including me) were also just returning from a 12-hour, 14-mile hike to a peak of over 11,000 feet.  They were tired and thirsty as were many of the other neighbors.  I bought a few glasses myself as I pulled into the neighborhood, and it was a welcome refreshment.  But then I started wondering why I was paying for lemonade a second time....

Yes, they get an "F" for this critical business discipline because they failed to consider how much they needed to "reimburse" their supplier for their material inputs - primarily lemonade mix.  The surprised look on their faces was priceless when I asked: "How much are you going to pay me for purchasing and storing your supplies, allowing you to 'rent' my pitcher and cups, covering  the maintenance costs to clean what you have made dirty, and so on?"  Somehow they thought that everything they needed to run their business would magically appear.  We settled on a payment that was very much in their favor (I am their father after all).  Although the example is somewhat simple and may even seem immature, you would be surprised at how many entrepreneurs and business owners really don't know what it costs to run their business.

Since they didn't understand their costs, let alone the difference between their variable and fixed costs, they had no idea how many cups they needed to sell per pitcher to break-even on the pitcher.  As I helped them figure this out, they realized that one of their pricing options would possibly make them lose money...

Their price for one cup, $0.25, was well-researched.  They had seen competing lemonade stands charge about this much, and they felt confident their product was at least as good as the competition.  Where they fell short was their pricing strategy for customers who bought two cups.  They would charge only $0.30 for 2 cups, a great deal for their customers - in fact, most upgraded to the two cup option.  However, once they learned about their break-even point, they realized that the number of cups per pitcher they would need to sell just to cover their costs was dangerously close to the total number of cups each pitcher would generate.  Pricing can be a tricky thing, always trying to balance between offering a good value and trying to be more profitable than the market will allow.

Perhaps the most entertaining part of this experience was hearing a conversation between two of the kids.  One said to the other: "You don't deserve to make as much as me because I sat out in the hot sun selling the lemonade."  The other kid responded: "Yes I do.  I've been handling the money and that's just as important as what you are doing."  It took them a while to work out their differences, but they eventually did.  And we need to learn two things from this - first, partnerships usually don't get into trouble until there is money or something else of value to fight over.  Second, compensation, equity, and contributions need to be clearly defined and all parties need to be held accountable to them from the commencement of the business.  Simple to say, very difficult for most to implement - but it goes a long way toward creating a framework within which all can succeed.

If the saying that you learn more from your mistakes and failures than your successes is true, then what my kids learned was well worth an "A" for effort and humility.  One son commented: "I'll never make those mistakes again."  Perfect - let's hope he lives up to that.