The Classic Case of Lemonade
Three days. Four Students. A Beverage Stand. The $5 Challenge.
Lemonade with mint or honey or both? Iced tea? Hot soup? I just laid out the product portfolio of the (sort of) business I was once part of during my college (TAPMI) days. As part of entrepreneurship course (New Venture Challenge), we were given the $5 challenge (classroom experiment popular in Stanford University). Our professor provided us with INR 100 as debt and we (team of 4) were asked to put INR 100 each as equity to start a business and make as much money as we could within three days. This very moment I could feel my entrepreneurial instincts roaring.
Someone has rightly said:
When life gives you lemons, make lemonade.
Well, we took this phrase quite literally! :P
To experience and understand how a marketplace actually works, my team came up with the basic idea of setting up a lemonade stand in our college premises during peak hours. We bought all the raw materials, got approval from the college management and were all set to be the lemonade sellers.
Some pointers on what, when, where, why and how we set it up:
- Identified the opportunity — The total population of TAPMI is more than 900 and comprises of students, faculty and other staff. Due to the basic need of hunger in humans, we felt food and beverage industry has a lot of opportunities. Lemonade is a refreshing drink , has health benefits, is easy to make and is generally preferred to be consumed to cool down the body. In TAPMI, only two vendors served lemonade but they did not provide the option of customization.
- Peak hours for us to sell the products were the lunch time (referred to as “T1” in this article) and evening time before dinner (referred to as “T2” in this article). The evening time was crucial for us to make good sales because our prospective customers were the students going to or coming from the sports practice. During lunch time, we set the stand in cafeteria and in evening, we set it up near the hostel area (which is near to the playground) to exploit the maximum of the opportunity.
- We arranged a basic desk and wrote the products offered on a chart paper and stuck it on the front of the desk. Also, we created a table standee for the prospects to easily check out the offered products (“menu”). We also added the prices of the items and payment option details in the menu to help people decide and build credibility.
- We agreed on making the products on an on-demand basis and not preparing them in advance. This helped us in gaining customer’s trust, let customer customize the product then and there and maintain the “hygiene” quotient.
- To create awareness about the activity, we had sent emails to all students and faculty of the college. We had also put few posters in the cafeteria and hostel area for promotional purposes.
- Our menu included the below items:
Day 1 — Sold around 10–12 glasses of lemonade at T1 and there was a demand of iced tea from our prospective customers. This gave us the idea of adding iced tea to our menu. We procured iced tea before T2 and were ready with lemonades and iced tea at T2. We saw high demand during this time like we had anticipated and in no time, we were out of lemons.
Day 2 — This day, we added another item to our menu, i.e. soup. We planned to sell this item only at T2 as people prefer having soup before dinner. But we saw that the demand for soup was quite less and we were left with the raw materials of soup (which we used the next day).
Day 3 — The ultimate day arrived and we were all set to use up all our raw materials. Due to word-of-mouth promotion for the past two days, we saw huge demand at T2 for all our products. Before we knew it, there was a long line of energetic customers in front of our stand. By the end of T2, we were out of raw materials for lemonades and iced tea, soup was still in stock.
Debt — INR 100
Equity — INR 400
Total sales = INR 2555
Cost of goods sold (COGS) = INR 1415
Operating Expenses = INR 124
Total earnings before interest = INR 1015
The profits were divided equally among the four team members.
Challenges and Learnings
- Importance of forecasting the demand — Since, this was an unplanned initiative, we did not get the time to forecast the demand for the first day, though we had some numbers in mind. At the end of day 1, we could see there was more demand than we had anticipated and had to pay that opportunity cost. We based our demand forecasting on the previous day’s sales and lost opportunity and arranged 50% more raw materials for Day 2 and Day 3.
- Catering to the demand (if possible )and managing product portfolio — After talking to our customers, we incorporated new products (iced tea), which significantly helped us in increasing our sales.
- Customization of the product — We made the customers feel empowered and in control by providing them the option to customize the product. Lemonade is a simple product but customers were ready to pay more when we offered them the power of customization.
Over the course of three days, we transformed the lemonade stand to a beverage stand, generated 100%+ profits and got slight taste of running a business.
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