You buy an engagement ring from a chain jeweler at the local mall. Later you propose to the love of your life. She says yes and you are so happy. Until your first jeweler’s credit card statement comes in the mail the next month. That’s right, you went for the credit card because you couldn’t quite afford the ring your future wife deserved. Now you’ll be paying it off for the next few years at a high interest rate. The ring was a good price, but the credit card interest is a backbreaker. What happened?
If the above scenario describes you, then you will likely not be surprised to learn that many jewelry stores are not really in the “jewelry business” (in terms of where they make most of their money). In reality, according to a speech I heard the other day (by a banker with a large firm), a high percentage of jewelry stores are actually in the financing business.
How Companies Really Make Their Money
We do not think about it nearly often enough, but it is true that there are many successful companies that Make The Majority of Their Money in Unexpected Ways.
Some Other Examples of “Transformer” Companies, i.e. Companies that Make Their Money In Ways that Are Different from the general public perception of how their business derives a profit:
1. Movie theaters are really in the popcorn and soda business, not the movie business.
2. Many Fast Food Chains are Really in the Real Estate Business, not the food business.
3. Most Restaurants are really in the Alcohol Business, not the food business.
4. Like Jewelers, Many car dealerships are in the financing business or even the repair business, not in the selling car business.
5. Many Printer Companies are Really in the Ink Business, not the printer business.
And on and On….these are just a few examples of businesses that tend to “break even” on their product but make a large profit on ancillary businesses (such as financing, repairs, etc) or side products (I wouldn’t be surprised if all or most of the single serve coffee companies derive a larger profit from their “single server cups” than from the actual coffee machines, for example).
Why Does This Matter to Fellow Broke Professionals?
We often don’t think about these types of things in our everyday life. But if you can find these connections and try to understand them, that knowledge can be very beneficial, both as a prospective entrepreneur, and as a consumer. Some jewelry companies were savvy enough to know that even if no profit was made on the jewelry itself, they could still have very profitable businesses through the financing of jewelry. If you have the entrepreneurial spirit, that could be a great lesson about how to think outside the box when starting a business.
Alternatively, as a consumer, the more we understand these types of connections and the better informed we are as consumers, the better chance we have of seeing through certain corporations “schemes” (and I mean that word affectionately in this instance). I know to not generally purchase a soda at the movie theater or a martini at a restaurant, because I know those industries essentially have to overcharge a great deal in order to make up for the break-even overhead of the rest of their business.
Do you know of any other examples of “transformer” industries/companies? Please discuss below.