Lemonade Stand Economics

Biz Quiz 101: read the following short, fictitious account and answer the question that follows.

Living the Lemonade dream…
First, you borrow $20 from your dad so that you can buy some disposable cups, some lemons, ice and a little sugar. You spend a grand total of $17.31 You ask your mom for a pitcher and a small table. Ready for biz, right? Well, not until someone first comes out to buy your lemonade. So, you get out your crayons and the empty fridge box sitting in the recycle bin and you enlist your creative talent (aka, big sister) to create a compelling advertisement. Just to make your point, you make a small pile of lemons next to the pitcher. You’ve got 100 cups, and enough lemonade to fill them each once, and you might have a little left over as near as you can tell. You do a little math and realize that in order to cover your costs you would need to sell all 100 cups at 17 cents each. Likely, though, you’ll give a couple of cups away, spill some and may just want a little something to cool your own thirst midway through the day. So you recalculate deciding that you will only sell 75. Works out to about 23 cents per cup. You tack on an extra 2 cents for profit and set out to hawk your wares.

Which part of the above process is the single most important factor in managing your business for success?

I look forward to your responses!

Dan

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3 Responses to Lemonade Stand Economics

  1. Ok, a couple points here. First of all, never let your sister handle PR. Second, never budget based on the goal of breaking even. Your lemonade stand, at current pricing, will generate $17.25 in revenue. Providing you kept the change from the $20, you’ll have to chip in $0.06 of your own to pay back dad. If you managed to sit out in the sun for 6 hours, you paid your dad $0.01/hour for the privilege of running a business.

    So, main thing, in my opinion, always price your product based on how much PROFIT you want, after ALL your costs are covered (let’s be honest, how many sisters work for free?). If, after a long day of work, you can’t afford to buy a glass of your own lemonade, I think you’ve officially failed.

  2. Ooops, I forgot to tack on the $0.02 of profit he decided on. Still, I think my point stays the same. That 6 hour shift still only paid him $0.24/hour.

  3. dboduch says:

    Honestly there are a couple of pieces that have this endeavor doomed from the beginning:

    1) Never borrow money from family, simply take it and say thank you with no intent to repay 🙂

    2) If you’re going to make lemonade, who is your target market? Are these the kids around the neighborhood? Or possibly their parents? Either way, I think spiking the lemonade with some vodka could be a great way to keep them coming back. Get ’em addicted and jack up the price.

    3) There is no accounting for:
    – interest on the loan
    – labor to sell, manufacture, advertise
    – advertising in general

    4) The single most important factor for managing the business for success was that they should have hired someone to make/sell the lemonade so that they could work on the business and not in the business. No way they’re going to grow doing all the work themselves. Especially at a profit rate less than the rate of inflation and no payroll.

    5) Obviously the price is too low.

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