SELLERS and BUYERS OF GOODS (Sari-sari Store)
1. The reality of Trading (selling). When persons engage in trade, no trader can raise the price of goods beyond a certain level, since the general public would always go for the lowest price. So traders or sellers set the lowest price possible, and still make sure that they get their starting funds, and also make an increase; just enough to pay for related support services. Traders (sellers) can make a big profit only if they can make their inventory go through the buy – sell cycle as many time as they can in a month.
Example: A store sells out all of it’s stock in 5 days, and they clean out a profit of P1,500. This means they can go through six 5-day cycles in a month. That is P7,500 each month. Let us say their stocks are worth P10,000. That is a profit of 75% each month. That is more than outstanding. (This is just an illustration). When this store makes that kind of profit, somebody else will put up a similar store. Most likely 4 others will follow, with much lower selling prices than the first. There will be 5 of them in the neighborhood. The number of sellers has increased, but the number of buyers remains the same. The next month, all of the 6 stores will take more than a month to sell out their stocks. Why? The number of sellers have increased, while the number of buyers remain the same.
2. The market (buyers). Buyers look for the lowest price possible to make the most out of their limited funds. Why go to Seller 1, when Seller’s 2 to 5 sells the same item P1.00 lower? Usually the late comers comes with a much lower price. Or, offers more items for sale so that the buyer goes to only one place for everything that is needed. Which requires a much bigger investment on the part of Seller B. When buyers go for the lowest price, the return on investment of the seller is affected. The percentage of profits over the investment will become much lower.
PUTTING THINGS TOGETHER
When Store 1 had a 75% profit in a month, Observers 1 to 4 set up Stores 2 to 5. So 5 stores started to operate in the area. Each store put up the same amount of capital – P10,000. But the number of buyers remained the same. The only way to encourage buyers to go to the new stores is to offer LOWER Prices. This meant that the new entrants will have lower returns on investments. The entry of the new stores will also lower the number of customers for Store 1, which will result in a lower income.
In the next month, the P7,500 income of Store 1 COULD end up getting divided equally among the 5 stores – at best. So each one will make a profit of only P1,500 (15% of P10,000); after paying for support activities and services. The store that does not make this amount, will end up closing, or investing some more to bring in more buyers.
The P7,500 income of Store 1 in the 1st cycle is the profit margin from the purchasing power of the total number of buyers. When the number of stores got increased, the total number of buyers did not increase. Their purchasing power did not also increase. This just got divided among all of the sellers. This example can be scaled up to many enterprises where the selling and buying of goods (tangible goods – kananang madala sa balay) is done.
The example given here is about Sellers and buyers of goods which happens every day. Most of us just don’t quite understand how this works. Even those who get into this selling game (sari-sari store). Enterprises who understand the hidden workings of selling goods, make it big – as in VERY BIG – like SM, AYALA, the GAISANOs of Cebu and KCC from Koronadal City; and the big stores in many cities and municipalities in the archipelago.