By Gerald Tay (guest contributor)
In a far, far away land, there’s a town called Lemon Tree. In Lemon Tree, you open a stall selling lemons.Your cost of each lemon is $1. If you sell a whole lemon for $1.50, your gross revenue is $1.50 and gross profit is $0.50 per lemon. Nothing to boast about.
Getting more profits by selling slices
You wisely decide there’ll be better profits selling by the slice than a whole lemon. Therefore, you slice the lemons into 6 slices and sell each slice for $0.50 each.
This has effectively increase your gross revenue from $1.50 to $3. Your gross profit has gone up from $0.50 to $2. Now, we’re talking…
Later, you realise the lemon can be sliced further into 10 slices instead of six and if you lower the selling price to $0.40 per slice, you’ll make $4 revenue and $3 profit. Wow!
In each instance of price inflation people paid exorbitant amounts for lemons and lemon slices that shouldn’t have been worth anything like the going price.
The cost of a lemon rose from $1 to $1.50. This time, 10 lemon slices will give a lower profit of $2.50 instead of $3 the last time. There were fewer buyers to sell to and smaller profit margins to be made.
You have to do creative selling to boost flagging profits.
Instead of 10 slices, you decide to slice the lemon into 20 slices and sell at a lower selling price of $0.30 per slice to entice more buyers. Doing this will give $6 revenue and a gross profit of $4.50. People are now calling you a business sage!
For buyers, the quantum price of a lemon slice may have gone down 40% (from $0.50 to $0.30) but the size of each lemon slice has also shrunk 70%!
It’s no longer a lemon slice. It’s bits and pieces of a lemon.
Throw in some discounts and hype
Offer an 8% discount to sweeten the deal. Create a ton of hype marketing for your lemon slice and watch the buyers flow in!
A $0.30 lemon slice is “sweetened” to $0.276. Your gross revenue is $5.52 with a gross profit of $4.02 for 20 slices. Hey look! This is more profitable than selling 10 slices at $0.40 each!
Simply put, prices today in Lemon Tree are set artificially low for a bigger mass market of “financially-impaired” lemonade drinkers eager to own an exclusive slice of lemon.
An allegory for how the world works today
It’s a perfect example of how the world and the economy operate. The fools work, slave and buy garbage, while the so-called winners enjoy “the good life.”
It all starts at a subconscious level. They show us something we want and charge us a lot only to get a small piece of it. The best marketers are those who know very well what the people need and want, but instead of giving it to them in its true form – they sell garbage.
Just like how developers are cashing in on $1 million or under properties today. They know they can’t sell high quantum units in the current market.
One of the oldest tricks in the developer’s book
One of the oldest tricks real estate developers use is squeezing a piece of land to its maximum allowable plot ratio for optimal economic profit (theirs, not yours).
It’s not uncommon to see today’s 3-bedroom properties built with less than 1,000 square feet and costing less than a $1 million price quantum. It’s also not uncommon to see less than 500 square feet properties selling like hot cakes either. They give the marginal buyer just enough affordability to own a private property.
This technique increases the profit of the developer significantly, and as you already know, property showrooms are “The Greatest Manipulation” of this world – you never know how the end product will turn out to be when you buy it.
Why I only buy resale properties of meaningful sizes
That’s the primary reason all of my successful purchases over the last 15 years or personal purchases are of resale properties of meaningful sizes.
While a smaller price quantum won’t hurt you nearly as much as a bigger price quantum, it’s still a “scam” as the real value is much less than the promised worth. In this case, buyers bought a lemon (slice) and they don’t know it.
It makes you wonder why today’s property buyers still fall for the oldest marketing trick in the world.
By guest contributor Gerald Tay, who is the founder and coach at CREI Academy Group Pte Ltd, an organization dedicated to empowering retail property investors with smarter investing philosophy and strategies. He is a full-time investor with over 13 years of solid experience in building his wealth through Property Investment and is financially wealthy today.