Used Bookstores

Have you ever wondered why you can only get a quarter for your well loved romance novel or 35 cents for your brand new copy of Harry Potter at the used book store when they can turn around and sell it for a dollar or ten? If the answer that helps you sleep at night is "They need to make a profit" then you're right, but not very much so. All retail stores must abide by the C.A.S.H. system of operation. C.A.S.H. stands for, capital, acquisition, sales, and holding. For any store to operate there is some fixed cost of capital to required just to open their doors. Whether this is in the form of renting a store front or building a website, each retail operation requires investment before any sale is made. One the store is in business it must acquire stock to sell. Even if that stock is in the form of commitments for product from vendors and manufacturers, some form of product must be procured before sales take place. Once the previous two occur, the retailer can then begin to sell their products. All those products that don't sell immediately require some further investment to hold them on the shelves. That investment could be the time of a shop owner to keep the store open, the cost of a warehouse to keep the goods in, or even just shipping to return unsold goods to the vendor.

All four of these things cost money. Let's take an example of a local used book store, we'll call it Mike's after our fictional owner, Mike. To open his store, Mike must rent a location in an area where he believes there to be people who want to buy his books. He decides a strip mall is the way to go so he plunks down $5000 for a deposit and $3000 for the first month's rent. Next he must furnish hos store with bookcases to display his books and that cost's him another $5000. We'll ignore all the other little things he might spend money on at this point. He now must buy books to sell in his shop. Fortunately, the local library is going under and is selling off all it's books for 5 cents each. For $10000, Mike has a store full of books. Now, before his first sale is made, Mike has invested $23,000. That's a lot of money just to offer books to people.

All that investment needs to be made back in 3 months, or Big Bob, the man Mike borrowed his money from, will break Mike's legs. So Mike has a decision to make. He can't sell his books at the same price he bought them for or he'll at best be $8,000 short at the end of the month as he doesn't cover his rent and bookcases (if he shuts down and gets his deposit back). Therefore Mike should sell his books at eight cents, right? Nope, Mike can't expect to sell 100,000 books in a month. In fact, he'd be lucky to sell 5% of that total. Mike, being a clever man, should sell his books at $1.60 right? Again, close but no cigar. Mike wants to keep his store open so the thing we're missing is holding costs. Let's say Mike runs the shop himself and works a 40 hour week. In a month he'll work 160 hours and if he pay himself $10 and hour that's $1,600 a month. Further, his utility bills are $1400 a month. This makes his holding costs $6000 a month including rent.

Here's where the problem gets hard. Let's assume that Mike charges the same price for all his books and that his price never changes. We have a total of $38,000 that must be made in the first three months by selling 5% of his books each month (5,000 + 4750 + 4513 = 14263 books). This means that Mike must sell his books at $2.70 to pay back Big Bob and cover his costs. After that he has a monthly cost of $6,000 and is selling 5% of his remaining books. This makes his cost per book in the fourth month about $1.40 and a profit of ~$5575. However, by his 14th month Mike is selling only 2438 at an average cost per book of $2.45 and profiting only $609.50. The profits keep falling in that manner unless Mike buys more books. At the 14th month Mike is making only enough profit to afford to buy books at a quarter a piece and replace the stock he sold. This means that forever afterward he will never make a loss if he can buy at least 2438 books a month at 25 cents each. This is what economists call the "break even" point.

Next time you walk into a book store to sell a book, think about Mike's store. Even if he's selling the books for $2.70 each and paying only a quarter, it's not like the book seller's trying to cheat you. They're just trying to break even!