“Creativity is the sudden cessation of stupidity.” – Edwin Land
As anyone who has ever run or attempted to run a business knows, profits are a puzzle you must solve if you’re going to stay in business and make that staying worthwhile.
Here’s something they don’t teach about profits in business school:
Their source is not always immediately obvious and they often come from surprising places.
Which brings us to today’s topic: popcorn…
Popcorn is one of many Native American inventions the world economy depends on. (Try feeding the world without corn and potatoes.)
For the longest time popcorn was a homemade thing until 1893 when Charles Cretors started marketing the first stream powered popcorn machine.
Mobile carts that popped corn starting appearing everywhere large groups of people gathered: fairs, circuses, parades, political rallies, parks.
And they were profitable.
Legend has it that a failed Oklahoma banker bought a unit, set it up outside his local movie theater, and bought not one, but three, farms with the proceeds.
You’d think that movie theater owners caught on. If you thought that you’d be wrong.
They didn’t want to deal with what they felt was an unseemly mess.
Then the Depression of the 1930s hit and to make ends meet theater owners started renting space in their lobbies to peddlers.
Slowly – amazingly slowly – it dawned on them that the guys selling popcorn in their lobbies were making a killing so they started to run their own concessions.
When they finally figured it out, not even the Internet experienced a boom this big.
In 1934, US farmers grew 5 million pounds of popcorn. Just six year later that figure was up to 100 million pounds. (The number is closing in on one billion pounds in the 21st century.)
A nice cash crop for farmers…but an essential “cash crop” for movie theater owners.
Here’s how the arithmetic of the movie theater business breaks down:
Movie theaters have to kick back 70% to 80% of ticket sales to the studios and middlemen who provide them with new release movies.
You pay them $10 for a ticket and they get to keep $2 or 3$.
How do you keep the lights on with economics like that?
Popcorn and other goodies.
The markup on popcorn in an average movie theater is around 1,000%. For every dollar a theater spends to bring popcorn in the door, it makes $100.
For perspective that’s 10 times more than the markup a kilo of cocaine experiences between the jungles of Colombia and the wholesale price on the streets of Chicago.
So selling popcorn in movie theaters is definitely a profitable business.
And without that popcorn (and other goodies) there would be no movie theater business – or else tickets would have to be $30 to $40 each.
And until relatively recently, without popcorn sales, there would have been no Hollywood because before the Internet and DVDs and cable – and going back even further, television – the local movie theater was the only outlet for Hollywood’s product.
So what’s the lesson from this long rambling tale?
Business models are not obvious to outsiders. (Note: “Business model” is just a fancy way for saying “how the heck do they actually make money”.)
Before you start a business, make sure you find out how the business model works – beyond the glamor and hype. You may be able to improve on it, but you better start by understanding the status quo. Figuring out the profit side of things “later” is too late.
Obvious potentials for profit can stare you in the face for months, even years. Thus Edwin Land’s quote I started this article with: “Creativity is the sudden cessation of stupidity.” That’s true for all of us.
New, and sometimes dramatic, new profit sources often come from surprising sources.
You may be helping make other people rich with your business and not even realizing it.
Bottom line: Ignorance is a very expensive indulgence. It pays to look around frequently.
– Ken McCarthy
P.S. For over 20 years I’ve sharing the simple but powerful things that matter in business with my clients.
If you’d like direction for your business that will work today, tomorrow and twenty years from now, visit us at the System Club.