Risk/Reward Situation to Ponder

[DanAtBooksInDemand]

I remember watching this movie where a guy from the 1800's is sent to the present time to see how debauched life had become. The friend who sent him gave him some coin change and said, "Where you're going this is worth a lot. You should be able to trade it for their money."

When the time traveler went in to a coin shop to trade the old coins, the coin dealers looked at him with deceit in their eyes, conferred for a second, and gave him a quote that was obviously very low. The guy's eyes bugged out and he said "That is very Christian of you!" and took the money gladly.

This scenario brings to mind the axiom about risk and reward, and how when one goes up, the other goes down. More risk, more potential reward, but the safer you play, the more meager your reward will ever be.

Here's my question: Were the coin dealers going high with risk, or playing it safe? Were they taking a high risk that they would get turned down for giving such a low quote, or were they playing it safe with a quote that would give them such a high profit margin, that no matter what their operational issues and overhead that day, they would be safe.

I think you can look at it either way: one being the long-term perspective, and the other being the short-term. Short-term they were taking a risk, which meant a high potential short-term reward. But long-term they're trying to play it safe with a high profit margin on every deal they make, which guarantees that they will get very little long-term reward, as their reputation teaches people not to take their coins there.

I do things opposite at my bookstore. I give high quotes for books, which gives me very little short-term risk, as the ones who bring in books will usually take the offer, but long-term I am playing very risky as I attempt to cover my overhead and operational costs on a very small profit margin, making it necessary to have a lot of traffic in order to make a long-term profit. The potential long-term rewards are high though, since I am taking such a high risk, because I am hopefully teaching people to trust my quotes and always bring their books to me.

[krisss]

I understand this - And I think it is a nice concept :-).

[ScottRobertson]

Here's my question: Were the coin dealers going high with risk, or playing it safe? Were they taking a high risk that they would get turned down for giving such a low quote, or were they playing it safe with a quote that would give them such a high profit margin, that no matter what their operational issues and overhead that day, they would be safe.

I think you can look at it either way: one being the long-term perspective, and the other being the short-term. Short-term they were taking a risk, which meant a high potential short-term reward. But long-term they're trying to play it safe with a high profit margin on every deal they make, which guarantees that they will get very little long-term reward, as their reputation teaches people not to take their coins there.

I do things opposite at my bookstore. I give high quotes for books, which gives me very little short-term risk, as the ones who bring in books will usually take the offer, but long-term I am playing very risky as I attempt to cover my overhead and operational costs on a very small profit margin, making it necessary to have a lot of traffic in order to make a long-term profit. The potential long-term rewards are high though, since I am taking such a high risk, because I am hopefully teaching people to trust my quotes and always bring their books to me.

I think you've got it backwards.

Giving lowball quotes like that is a long term risk to operations. Anyone that knows the value of their product will realize the terrible offer and reject it. That person will never come back again because they know you will lowball them. PLUS, that person will tell all their friends and maybe even anyone on the internet about this, and you will lose even more people that way. There is very little short term risk because if you get the item for cheap you know your profit margin will be large on it, and if you don't get it then you haven't lost any of your money .. just reputation.

Giving high quotes, like you do in your bookstore, will have opposite results. High short term risk (cash flows could be an issue), and lower long term risk (return customers).

... your thoughts?