Monday, November 24, 2008

Unfortunate effects of erroneous math

I hate to see local small businesses close their doors. But it's hard to be overly sympathetic when said business is built on a flawed concept or poor execution: inferior customer service, inaccessible location, highly specialized product offering, etc.

Recently, a new children's clothing resale shop opened right across the street from my Curves facility in our relatively small town. I think resale shops can be fun, because I like having new wardrobe options for my own personal dress-up doll (aka my daughter), but won't pay full price for clothes she won't be wearing very long. It's also great to have a way to recycle old clothes in exchange for new ones!

The first issue I had with this particular store opening, however, is that there is already a kids' resale shop in our small town. There used to be two, in fact, but one of them went out of business. Hm. I definitely encourage those with the skills and ambition for entrepreneurship to go for it, but a little market research would have offered a clue that a population around 20,000 can support only one kids' resale shop.

Shortly after they opened, I stopped in the new store to welcome the owner and do a little shopping. Since they had not been open very long, the limited selection was forgiveable. So a few days later, in a neighborly effort to support the cause, I brought in a bag full of clothes that I was ready to part with (I'm saving the cutest stuff in case we have another daughter before they are out of style). The owner loved everything and decided to buy all of my items except one little bib that had a stain. Cool. I said I would just take the value in trade, since I had found a couple of things on her racks that I liked.

Usually, resale stores will give you higher value in trade than they will in cash, since their cost of the clothes you take is less than the retail value. The owner had me sign a form explaining that she pays consignors 30% of the resale value of the clothing, either as a cash payment or trade-in value. She tells me she will give me $9.25 for my bag of clothes.

Bringing clothes to a resale shop is always a bit frustrating. I have found this when I've brought items over to Plato's Closet before too. You are never going get what you think your clothes are worth. But we go ahead and take what they will offer us because: a) These are items I don't want anymore, or else I wouldn't be here. b) The store doesn't care if they get my stuff or not, so there is no motivation for them to pay more or argue with me about it. c) If I took my clothes to Goodwill I would get nothing. d) I could sell them for more $ on eBay or craigslist, but it probably wouldn't be worth the extra effort. e) I am already here and don't want to have wasted my time.

In this particular instance, the clothes in the bag were rejects from what I had sold to a nicer resale shop anyway, so I didn't really think twice about accepting her nine dollars and twenty-five cents.

I brought the items I wanted up to the counter, paid the difference that I owed, and headed on my way. I didn't think it was fair for her to give me the same value on trade-in than she would have paid me in cash. But it wasn't until later when I whipped out my trusty calculator that I figured out exactly how ridiculous that is.

She paid me $9.25 for my bag of clothes. Her official documentation explains that she pays 30% of resale value, which means she will sell all of my items for $30.85. If she had paid me $9.25 cash, that would constitute her cost of goods, and she would make 70% profit. But I decided to trade for $9.25 worth of merchandise from her store. That merchandise would have also been purchased from someone like me, at 30% of resale value. Therefore, the clothing that I received in exchange for mine cost her only $2.75 (30% of $9.25). So she will sell my clothes for $30.85, and her cost was only $2.75 (or less if the prior customers chose trade value instead of cash, do you see?). That is about a 90% profit margin.

With that kind of crazy math, she ought to have been rolling in profit! Except that sometimes people figure out schemes like that and decide to shop elsewhere (oh, and also there was already a kids' resale shop 3 blocks away, remember?). The thing is, I imagine the owner never examined those figures, and was oblivious to the flawed math. Unfortunately, her business didn't last long enough for me to get around to writing her a (very nice) letter explaining the inequitable calculations.


Bridget said...

You're so smart. I mean it. I would have gone home and thought, hmmm, something is fishy about that. And that would have been the end of it. Way to work the calculator.

I know what you mean about stupid business ideas in an oversaturated market. See also: restaurants in Utah County. There was one building on State Street in Orem that Jeremy and I used to drive by all the time and I swear it was like restaurant of the month, tops.

Jeni said...

I also went in the same store. When I mentioned that there was already a kids resale in town, she said "yes, but they over price everything, we want to make things affordable for people." I can sort of see where she is coming from, and the idea was great, but I never saw too much difference in her prices versus the other store.


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