Lemonade Empires
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You’re walking down the street on the way home when you hear, “$2.50 for a cup of lemonade!” You look across the street and laugh a little.
A freckled little girl is running a lemonade stand! $2.50, huh? Someone’s running a business.
Meanwhile, a bead of sweat trickles down the side of your face and you swallow, wincing at the dryness of your throat; it’s a hot July.
You cross the street, stop by the stand, purchase a mid-sized cup and take a swig. Oh, this is nice. The lemonade is sweet but not sweet, tart but not too tart.
The young child stares up at you, positively beaming at your reaction over the lemonade.
“What’s your name?”, you ask her.
“My name’s Jane!”
“Where did you get your lemons from, Jane?”
“From my backyard!” she burst out happily, pointing over her shoulder. You glance over the fence and see a sprawling, massive lemonade tree. Looks like it’s growing hundreds of lemons.
You take another sip. The flavor hits just right; even the amount of sugar added is well balanced with the tartness. Yeesh, that’s good.
“How many others did you sell to before me?”
“Wellll, there was that old man before you & his wife… Some of my friends? And a few families that came this way; I’m not really sure.”
Huh so there’s some demand here.Your entrepreneurial mind starts spinning up.
“And how much does it cost to make the lemonade?”
“It’s free! I just use the lemonade and some sugar.” Well nothing’s free exactly.
“Oh, well how many spoons of sugar & lemons do you use to make a cup?”
“I use 2-3 spoons of sugar and at least 3 lemons & little bit of tap water.” 3 lemons? You look down at your sizable cup, impressed that just 3 lemons could fill the entire thing. You glance back at the tree and down at the cup. Hundreds of lemons on that tree, 3 lemons a cup, a few spoon of sugar, $2.50 per cup….This could work…
Images of piles of money flash before your eyes; excitement grips your body.
“Ok see ya Jane! Thanks for the lemonade.” You head home, your mind spinning of all the opportunities you see with Jane’s lemonade stand.
It’ll be huge, HUGE I tell you! I’ll invest some capital and we’ll scale up operations. We’ll pitch lemonade carts run by schoolchildren on each neighborhood corner, open chapters in neighboring towns, then the county, the state and finally the nation!
We’ll then pitch our lemonade as Jane’s Lemonade to big box stores like Whole Foods. We’ll be the Girl Scouts of lemonade; a portion of the profits can go aside for starting college funds for low-income students. 1
You can envision the empire already; the Lemonade Empire!
A share of the profits towards a good cause & you’ll be wealthy as heck. Who could ask for more?
You sit down at your desk and start drawing up the business plans. You graph out the business finances and it looks like:
Wait but we are restricted temporarily by the number of lemons we have on Jane’s tree. We’ve got, what? 300 or so lemons?
The dashed line is when you’ll run out of lemons
What more will this take? You begin researching how to run business revenue calculations. You type, “How to maximize profits” into Google and hit enter.
Marginal revenue? Marginal cost? Ah, reminds me of high school; I can feel the sleepiness already.
Images of laying half-awake in economics class and the memories of sheer boredom hit you.
Marginal revenue - The increase in total revenue that comes from selling one additional unit.
Marginal cost - The change in total production cost that comes from making or producing one additional unit.
What does this all this even mean? You read further.
Okay, so it seems that profit is maximized when marginal cost = marginal revenue. Which means when I can make lemonade for the same price that I can sell it, then I know my profit is tapped out here.
But something doesn’t quite sit well with you over the graph.
Why does the marginal revenue over time drop? That makes no sense. Why would the 40th cup of lemonade that I make, make me less revenue than my 1st?
Well as it turns out, the more that is something is produced, the price of that thing is going to drop!
If you make 1 cup of lemonade for a street-sized customer base, it might be super valuable; you might be able sell it for $10. That one thirsty customer who just tapped out of a 6 mile run and is sweating buckets would love nothing more than a cool cup of lemonade on a hot summer day.
But if you make a 1,000 cups of lemonade, you might have to pawn each cup off for a few cents at that point; there’s simply not enough demand for all that lemonade.
This is known as the law of diminishing marginal utility, effectively as consumption increases, the marginal utility derived from each additional unit declines.
Simply put, for each additional cup you make, you are able to sell that cup for less than the one cup before it. Hence the downward slope of the marginal revenue.
But you notice something else different about the graph above. The marginal cost is increasing; a double whammy.
Why would the next cup be more expensive than the last? Doesn’t my 50th cup of lemonade still contain the same ingredients as my 5th?
Well, squeezing 10 lemons might be OK; you could do it in under 10 minutes. But 300? That’s a toughie; that’s afternoon on a couch with a ice park on a sore arm. How about 3,000? You might want to get a juicer for that, an additional fixed cost.
Then consider storage of such lemonade. You can easily store 10 lemons’s worth of lemonade in a jug that you keep in your fridge. But 1,000 cups? That’s about 62.5 gallons! You’ll need more fridge space; maybe new refrigerators. And beyond a certain point, you may be required to face certain food & health regulations that other beverage distributors are subject to and the food processing standards (i.e. pasteurization), storage requirements and other costs that come along with that.
Then there’s variable costs: cups, sugar, acquiring lemons, transporting the lemonade, acquiring new stands as you open more locations, more people to train; all of these increase with production.
Now, lemonade stands don’t experience this phenomenon since they operate at too micro a scale. But lemonade empires, cranking out volumes of lemonade, do.
When you combine these two, profit curves are quadratic in nature (turns out infinite profits are not really a thing.) and lemonade empires are not exempt to this phenomenon.
Being a millionaire is looking aways away.
Well, it’s a start. Once we get this going, I’ll start looking into getting some lemons directly from the farms, by the truckload and we can start recruiting the other neighborhood kids too. We can make it; we’ve just got to grind it out.
Content, you head to bed, ready to convince Jane and resolved to make millions.
The next day, you head to the same spot, but there’s no lemonade stand!
What is she doing? Doesn’t she know it’s a hot day and this is a prime time & spot to sell? Time is money!
You walk up to Jane’s house, knock on the door and Jane answers. “Hey mister!”
“Hey Jane! Why aren’t you selling lemonade?”
“Oh it’s hot out.”
“Yeah but doesn’t that make it a good time to sell?”
“Yeah but it’s also a lot of work and I got bored.” Jane’s dad shouts for Jane to come in and stop letting the A/C out.
“See ya mister!” She shuts the door on you and with it, your grand plan of making millions.
END SCENE.
If you are like me, then high school classrooms, stuffed with silent, high-energy teenagers constrained to neat columns & rows of desks led by a single lecturer at the front, were where intelligence and wonder went to die. The sweltering heat, dull conversations, and the arbitrariness of the classroom exercises led to a sort of collective mental lethargy.
The spectrum of an average day in a high school classroom
This isn’t to say the teacher did not matter; the learning experience could range from a little entertaining to downright, soul crushingly boring. Rather it was due to the stiff academic structure relied less on a genuine understanding of the subject matter and more so on memorization & regurgitation.
Instead of conveying the truly awesome manner of these discoveries, we were told it’s for “good grades” or “college” or “a job”. These answers struck me as insufficient; my teenage brain did not feel the need to engage and so, many of the coolest and more interesting phenomena went right by me.
From marginal cost curves in economics to Newton’s First Law in physics to calculus in mathematics, each of these principles were introduced in cold, dry situations and isolated from the real world. And with it, the genuine coolness of the subject matter was surgically removed from the topic.
And that’s the modern tragedy of education and our relationship with knowledge. We are hell-bent on understanding or “learning something” or scoring high on a test, that we distill the knowledge away from it’s original context. And so, we see textbook knowledge as being removed from the real world. These equations, principles and theories are meaningful because they have the ability to describe, explain and define the world around us in reliable, measurable ways.
Me after working in the real-world, post education.
And that’s, in part, what I’m exploring with this newsletter: to remain curious about the world around us; to see things and ask questions. To understand the beauty that underpins our everyday happenings and be able to meaningful define & explore it. And when we do, I think we'll not only have a greater appreciation for ourselves and humanity at large, but a greater sense of wonder in the world.
Keep on learning.
-Kiran
Turns out the Girl Scouts of America bring in, on average, $800 million dollars each season selling girl scout cookies.
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