Nicollet.Net

Suppose that I, as a former CSS expert, decide one day to enter the coffee mugs with clever sentences on them market. Everyone likes a mug with overflow : hidden written on the side, so they will buy them for about $15 + shipping and tax.

Assuming that I’m going to spend my days at home ordering cheap white coffee mugs in bulk $5 apiece, paint overflow : hidden onto them and shipping them out to customers, how much can I expect to earn? What’s useful here is the amount of money left behind after a sale once the raw materials have been paid for : my business has a gross margin of $10; if I sell 10 units a day, the daily profits would be $10 times that number, or $100.

Good Old Karl Marx

What if there’s a boom in the clever coffee mug market, and every single person on the planet absolutely needs to have an overflow : hidden on their desk? This means I can sell as many mugs as I want and reap a $10 profit on every single one of them. Production speed is the limiting factor : if it takes me an entire hour to process a single mug, it would take me three years of 10-hour work days to service a small group of 10,000 customers, assuming none of them break their mug and decide they want another. So the best I can get is $100 a day.

But wait! There’s this wondrous tool called Professional MugBurner 2000 that burns the black text onto the mug in a mere five minutes, instead of having to paint it by hand: that would double my productivity and get me $200 per day. And there’s still no sign of the demand dwindling! Should I hire someone to help me?

Well, I spend 5 minutes making a new mug, and a full 25 minutes packing it and shipping it. This means every hour there’s a full 50 minutes where the MugBurner is not used, which is kind of a waste. If I hired five people just like me, we could make and ship six times as many mugs and earn $1200 every day. The fair thing to do would be to split this evenly amoung ourselves, because we’re doing the same job. On the other hand, I own the MugBurner and paid for it with my own money! Is it fair if someone who never paid a single dollar for a MugBurner earns as much as someone who forked over $10,000 for it? Remember, I’m the greedy capitalist here.

So, I pay every single one of them $100 (because that’s what they would earn without me or my MugBurner) and keep the remaining $700 to myself (and the IRS). This is getting really interesting. In fact, I guess I don’t need to work at all : I could just hire another person and earn $600 every day! This is a demonstration of what Karl Marx was saying about capitalism: my six workers earn $100 per day making and shipping mugs, whereas I earn $600 per day doing nothing, because I own the MugBurner.

Supply and Demand

Right now, if someone wants to work in the clever mug industry, they can be on their own or they can join my team, which lets me set any wage that’s above the standard $100 per day. But sooner or later, other investors are going to notice what I am doing, and decide that they should be doing it too. After a few weeks, there are literally hundreds of people like me who bought a MugBurner, hiring all the workers they can, until there’s no skilled mug workers left on the job market.

In fact, since you now have to steal the workers from your competitors, you tend to offer higher wages. « You get $100 a day doing this? » they would say, adding « well at my factory you’d get $150 a day instead! » While this does divide their profits in half, it’s still better than having no workers! After a while, the wages end up at some high figure, like $190, and the investors who can’t stomach a daily $10 return on their $10,000 investment just leave.

When you need some talent that’s hard to find because everyone else needs it, you will have to pay top dollar to get it. Everyone knows that a Senior Frobuzz Programmer earns $75,000 a year, so there’s no point in trying to hire one if you can only afford paying him $50,000! At best, you could try offering him a different job : if you can’t compete on the main market, try to find a niche market where you can be number one. For instance, a $50,000 Dark Lord of Software Architecture position at a startup can be more compelling than a $75,000 Senior Programmer Drone position at a megacorporation to someone who hates boredom and enjoys building new useful things with a clear vision.

Hell, some of us might as well work for a startup for free because we like being the founders and building up something from scratch that is actually ours!

So I fire all my workers, and start renting the MugBurner to yound mug entrepreneurs who need it. I used to buy $5 worth of raw materials, pay someone $5 to spend five minutes on the MugBurner, sell the resulting mug at a price of $15, and keep the $5 surplus. Now, the entrepreneur buys whatever raw materials he wants, pays whatever wages he wants and sells the mugs at whatever price he wants, but he has to pay me a $10 rent for every five minutes on the machine.

Wait… $10 for five minutes? The entrepreneur would have to pay me his entire profits! How can this work?

The key to this approach is that instead of having average workers toil to make mugs I design and sell, I get talented individuals that are better than average (and better than me, too) who earn enough money to make those $10 a perfectly acceptable price!

Sarah does not have much in the way of mug design, but she’s a MugBurner goddess who can churn out those mugs ten times as fast as anyone. With the MugBurner, she still gets a $200 margin per day just like any other worker would (because shipping takes a lot longer than making the mugs), but she only pays $20 rent! This is a $80 improvement over not renting it.

Jonathan is a true marketing genius: he invented a clever O R’lyeh? snow owl mug that Cthulhu enthusiasts will buy for $40. He can make them on his own (ten per day) earning $350 profits per day, or he can rent my MugBurner to make twice as many, earning $700 profit per day and paying me a $200 rent. This leaves him with a $150 improvement over not renting my MugBurner!

If I find enough people like Jonathan and Sarah, I will be getting $1200 every day. And they will all be very happy about it, because they get a lot more money for their work as well.

Enabling Small Businesses as a Business Model

Now, suppose that instead of providing these talented people with a MugBurner, I provide them with something else that’s just as useful (in the sense that it directly contributes to profits), and is priced high enough to earn a nice profit for me but low enough to make it appealing to the top earners. What do I get?

Etsy : enables talented artisans to sell their work online.

Amazon Web Services : enables small companies to rent only the IT infrastructure they need.

Paypal : enables small retailers to easily sell things online.