It’s no secret that I love free market capitalism.  I’ve actually become so fanatical in my dedication to capitalism that it has become sort of a religion to me.  Every night I kneel down and pray to a statue of Milton Friedman, which was made in China out of cheap and slightly toxic plastic.

One of my leftist leaning friends even went so far to call me the “Darth Vader of Economics.”

Much like the famous Dark Jedi has preferred methods of execution, such as force choking and light-saber slashing, I prefer certain business models.

What I am talking about specifically is the sales volume to price ratio.  Is it preferable to sell a large and expensive product with long life cycle and large profit margins, or to sell a cheap product with a small profit margin more often?

An example of this would be Toyota vs. Starbucks.  Toyota makes a few thousand dollars on each car, but a single customer only replaces their car every few years.  Starbucks may make a dollar on each cup of coffee, but they can sell the same customer multiple cups of coffee in a single day.

I prefer the “cheap goods more often” business model used by Starbucks, and there are a few reasons why.  I believe that this holds particularly true for new business startups.

• Customers are more likely to try a new product if it is low risk. Spending $25,000 on a crappy car is far worse than wasting three bucks on a mediocre cup of coffee.
• Sales of cheap goods are not as heavily affected by a poorly performing economy. A consumer is more likely to forgo the new car or computer than a measly cup of coffee.
• Production and product design costs are much lower for cheap products. Such businesses require less investment capital to start.

Another piece in this puzzle, which I promise to discuss in a future post because it raises serious ethical issues, is the difference in the the sales and marketing tactics used to sell high volume, low cost goods.  Starbucks is the perfect example.  I believe a large part of their success is due to the caffeine content of their coffee.  With over 200mg of what pretty much amounts to legal crack in each cup of Starbucks brew (twice as much as a standard cup of brewed coffee), not even an executive working for a big tobacco company could deny the addictive properties of Starbuck’s product.  Somebody please call me when Toyota figures out how to create compulsive cravings for their automobiles.

My advice then is to keep this in mind when investing or starting a new business.  As a Dark Jedi of capitalism, it’s impossible for me to deny the economic benefits of a world where everybody chugs coffee, chain smokes cigarettes, and mashes their faces full of fast food.  (I have ethics, I swear!  I promise to discuss that soon!)

(Also, I am aware that seconds after I posted this, Starbucks announced that they are closing stores.  If you remember correctly, Starbuck’s problems started before the economic cooling.  The company expanded too fast and the market couldn’t sustain a store on every corner.  The economy isn’t helping but Starbucks did this to themselves.)