Business Lessons From A Lemonade Stand

Ignore these at your own peril

A highly accomplished CEO once told me that he didn’t hire any MBAs because he didn’t think they could even run a lemonade stand. The implication was that, to quote Yogi Berra, “in theory there is no difference between theory and practice, but in practice there is.” That CEO’s comment resurfaced in my mind when my kids decided to make some money by selling lemonade in our neighborhood.

My twins are 10, and my youngest is six, so this was the perfect task to occupy them during a day when school was not in session. I kept out of it, with one exception. I insisted that they sell lemonade at a profit. As I explained, it’s no use selling more cups of lemonade if you are losing money on each cup that you sell. A lesson, by the way, that some professional company managers could use a reminder of.

Armed with some bulk bags of lemons from the local store, the lemonade stand venture was set in motion. With a cost per cup of about $1, the kids decided to set the price at $2. Not too bad – a 50% Gross Margin, although I am certain that’s not how they thought of it in their minds in figuring this out.

Our nanny acted as the VP of Marketing, with flyers posted at local businesses and the library. A large sign was also designed by the kids under her supervision to attract those passing by. Everything was ready to go.

I must admit, I was a little nervous. I didn’t want the kids to be crushed if all their efforts didn’t amount to much. After all, who knows how many people would be around or even want a cup of lemonade. So when they came back an hour after they set up their stand, I feared the worst.

My worries were completely unfounded. The kids were elated – they had sold out of their lemonade in short order and had pocketed a nice profit for themselves.

What went right?

First, the weather was great. Sunny and hot, with many people passing by.

Second, their marketing paid off and some people had seen their flyers.

Finally, there were a few nearby construction crews working on building houses, and apparently a cup of lemonade on a hot day was exactly what the construction guys wanted to quench their thirst.

I have to say, I was a little jealous. The quick and effortless success my kids experienced in this mini business venture wasn’t at all representative of my experience in business where success needed to be hard earned with many ups and downs along the way. But I was happy that they had a good experience and were excited.

They were so excited that towards the end of the summer they decided to do the lemonade stand again. The business plan was unchanged – why mess with success, right? Same lemons, same marketing, similar sign.

When they went out I wished them luck and went about my business. Once again, they returned rather quickly. Only this time, their faces were glum.

“What happened?” I asked.

“Nobody came” was my oldest son’s reply. The rest shortly followed, carrying the lemonade. It was stored in the fridge and the kids are drinking it at home to this day.

I couldn’t believe it. How could the same business, with the same product in the same location be so successful one day and be a complete failure another day? What went wrong? And what could I learn as a business analyst from my kids’ experience?

• No matter how hard we work, luck is a factor in business. The first time my kids got lucky that there were many construction workers who wanted to buy their lemonade. That’s not a usual occurrence in our neighborhood that can be relied upon on a regular basis.

• Extrapolating from a small sample is dangerous. Before assuming that a business is attractive, we need to observe it over a period of time that includes both good and bad conditions.

• It’s important to understand the external environment that affects each business. The late summer period for my kids’ second lemonade stand attempt was during a period when many people were away on vacation and there was little pedestrian traffic passing by their location.

• Success can breed complacency. This time around the kids didn’t get to advertise at the library, because it was closed when they went to put up their flyers. They didn’t try again – they didn’t think they needed to given the easy success of their first lemonade stand.

Most businesses are far more complicated than a lemonade stand. Nonetheless, these lessons are just as useful to their managers as they are to kids planning their own lemonade stands. Unfortunately, all too often I see both investors and company managers ignore some or all the above lessons – at their own peril.

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About the author

Gary Mishuris, CFA is the Managing Partner and Chief Investment Officer of Silver Ring Value Partners, an investment firm that seeks to apply its intrinsic value approach to safely compound capital over the long-term. He also teaches the Value Investing Seminar at the F.W. Olin Graduate School of Business.