The Pricing Newsletter

June 2020 issue

Hello Pricers!

Welcome to the month of June. School may be out, but that doesn't mean that you should stop learning.

The economy is undergoing a number of changes each and every day. What have you learned recently to protect your business from the increasing risks in the marketplace?

Do you need some assistance with your pricing strategy?

Pricing Question from a Reader

My business is slowing down, so I'd like to start flipping things for profit. How can I decide what I should flip?

Flipping items can be very profitable. Aided by a combination of luck, market insight, and hard work, many flippers have earned great fortunes in the blink of an eye. That said, flipping can be fraught with risk and can often lead to financial ruin.

Not only do flippers have to worry about shifts in market demand for their items, now attorneys general are increasingly accusing flippers of price gouging. Even if a flipper manages to avoid a guilty verdict, the cost of mounting a legal defense can quickly eat away at any accumulated profits. For that reason, I'm going to point out that you may want to contact a lawyer before getting into the flipping game. I'm not a lawyer, and the laws vary greatly in different jurisdictions. As such, nothing I discuss here should be construed as legal advice.

With the disclaimer out of the way, we can finally dig into your question. I thought about some of the characteristics that I would look for in a flipping opportunity. I think that it primarily comes down to three factors:

  • Low Risk
  • Quick Turnover
  • High Margin

Low Risk

Flipping over a long enough time period is inherently risky. When a large segment of the population believes that it can invest all of its money in a given market segment for a handsome, speedy, and risk-free return, bubbles will form and an inevitable collapse will follow. For this reason, risk must be monitored and managed with care.

The following features, among others, should be carefully examined prior to investing heavily in one's flipping empire:

  • An unfair advantage - In an ideal case, you will have some sort of differentiator that provides you with a benefit that is difficult for the masses to emulate. In many cases, the more competition that exists, the more pressure there will be to lower your margins. Here are a few common differentiators:
    • A difficult to acquire certification
    • Substantial domain knowledge
    • A powerful distribution pipeline
    • A Low moral threshold
  • Strong signals of quality - You need to be able to tell, prior to any acquisition, and certainly prior to distribution, that your items are not defective, substandard, or inauthentic. Without being able to catch problems before you make a purchase, you are likely to be forced to accept significant losses due to the reasons outlined in the market for lemons. Additionally, your reputation may suffer, should your customers prove unhappy with their purchases.
  • A lack of competitors operating at scale - Companies that are able to flip significant volumes will be able to enjoy increased efficiencies due to specialization of roles, increased buying power, and the ability to influence the overall market. Additionally, they may be able to absorb losses for a longer period of time than you can remain solvent. Most importantly, however, the entrance of large and often slow-moving competitors may signal that the market has matured and is ready for a significant decline.
  • Demand from multiple potential buyers - The greater the number of would-be customers, the higher the price that you can command and the greater the volume of inventory you can move. Markets containing few buyers have the potential to leave sellers with relatively little pricing power.
  • Scarcity - Whether due to increased demand, supply shocks, or plain old cornering of the market, reductions in availability of a good can prove quite profitable - when they can be predicted with a reasonable degree of accuracy.

Quick Turnover

A speedy cycling of inventory is beneficial in any marketplace, but it is crucial in the world of flipping. As in all cases, the faster the process of flipping becomes, the more often it can be repeated, and the more profit that it can generate. More importantly, cycling through inventory quickly is a form of safety for flippers. Markets for flipped items can turn on a dime, so the longer the delay between your purchases and your sales, the less likely that you will find yourself with inventory that cannot be sold for a profit.

Here is what you should be looking for:

  • Buyers who act quickly - There are many reasons why customers feel as though they cannot delay the buying process. Some may act out of fear. Whether rationally or not, they may believe that dire consequences will befall them if they don't act quickly. Perhaps they were even taught to believe that if they don't act soon, they'll be priced out of the market forever. Others are more apt to act out of greed. In any case, buyers who simply can not or will not delay buying decisions are likely to be buyers who will accept relatively high prices with a minimum of haggling.
  • Items that don't need to be aged - Many items, like wheels of high quality cheese and barrels of whiskey, increase in value due to their age, rather than just their scarcity. Items that need to be held to appreciate in order for their value to increase, are not suitable for flipping, because much of their perceived value cannot be captured prior to a quick sale.
  • Products that don't require post-purchase investments - The ideal flip should look like a financial transaction. The flipper pays a bit of money for a good and then sells it for even more money a short time later. Outside of business textbooks, few flips are ever that clean. Some require labor, an expensive affair that often scales poorly. If you're flipping houses, you might need to time dealing with contracts, performing repairs, and marketing them. That labor represents waste, every second of which is a reduction in the immediacy and quantity of profit that can be earned.

High Margin

A good flip is, by definition, a profitable one. It goes without saying that it makes little sense to risk your valuable capital on a venture that can not provide a reasonable return. All else being equal, you'll want to maximize the profitability of each flip.

Be sure to look for the following:

  • A large division between acquisition cost and sales cost - This one should hopefully be quite obvious. The larger the spread, the more desirable the flip. In the ideal case, the difference won't just be large, it will be growing quickly. This will ensure a strong level of profit while simultaneously discourage any delays from being introduced by a prospective buyer.
  • High degree of leverage - When you use other people's money, you can increase the number of transactions that can be performed in a given time period. More transactions, of course, translate to more opportunities for profit. Sure, leverage often entails an increased level of risk, but there are often opportunities to use unsecured loans, investor money, or consignment arrangements. In rare cases, you may even be able to perform arbitrage when you have insight into two opaque markets.
  • Perceived potential for resale - When a buyer is acting solely as an end user, his willingness to pay will be limited. These limits often disappear, or are raised, when buyers believe that they can resell the item for more money in the future. This line of thinking, often referred to as the greater fool theory, can be pushed by salesmanship on your part. Ideally, however, it will be pushed by the media, society at large, and simple greed. Do not discount the value of this mentality; it can turn what would otherwise amount to mediocre profits into large fortunes.
  • Unsophisticated or uninterested suppliers - Some sales channels are full of suppliers who try to squeeze every last penny from a sale. Every once in a while, however, you'll come across vendors who either desperately need income, aren't interested in maximizing income, or just don't know what they're doing. It could be the result of poor management, corporate liquidation, or even a business strategy that is focused on a goal other than profit maximization. In any case, remember this sage advice: profit is made on the purchase, not on the sale. In other words, if you can get a good deal when you're buying, you can still make a profit if you're forced to sell at a lower price than you would otherwise desire.
  • Minimized ancillary costs - Far too many flippers only focus on their acquisition costs and their receipts. Businesses must also keep track of other costs that squirrel their way into flipping businesses. The financial pain from overhead, holding costs, transaction costs, transportation, spoilage, and other costs must be monitored and minimized as much as possible.

Conclusion

While I wouldn't go so far as to suggest that flipping is a sure-fire means for generating wealth, there are better and worse ways to go about it. Like any business endeavor, flipping shouldn't be attempted without careful thought and planning.

Questions come from readers like you. If you'd like your questions answered, send them my way.

Pricing in the News

From the Blog Archives

Notable Pricing Quote

"The alchemists in their search for gold discovered many other things of greater value." -- Arthur Schopenhauer

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