Your niece approaches you and says "Since you're a management consultant, maybe you can help me. I want to buy my mother a present for her birthday, and I was thinking of opening a lemonade stand to earn the money. Tell me what you think of my plan."
Isn't she cute? Yet this is a serious case (from Bain, no less). The interviewer is trying to see if you can set up a value chain for your niece. Get out your notepad.
You: What kind of present do you want to get for your mother?
Interviewer: I want to get her a pair of gold earrings.
You: That's a very nice idea. I'm going to assume that you want to buy a pair of earrings that cost $50.
Interviewer: Actually, the earrings I want cost $100. (The interviewer is trying to raise the bar a bit.)
You: Okay. When is your mom's birthday? What's your time-frame?
Interviewer: My mother's birthday is in three months.
You: What kind of time commitment can you make to the lemonade stand? How many days a week do you plan to run the stand?
Interviewer: I have to go to school during the week, so I think just on weekends.
You: Here are some of the considerations you need to make if you want to earn $100 in three months from your lemonade stand.
What are your expenses? Let's say that you need to buy the pitcher, which is $2. Every 100 plastic cups will cost you $1 in direct costs. Those are your base expenses.
You then have to make several cost decisions. What size cups will you use? Eight-ounce cups will mean that you can serve more cups of lemonade per pitcher. (If it's a gallon jug, with 64 ounces, then you can serve eight cups per pitcher. Sixteen-ounce cups, which may be perceived as a better value, means that you can serve only four per pitcher.)
You must also decide what kind of lemonade to serve. Lemonade made from powdered concentrate is probably the cheapest - perhaps $1 a gallon. Lemonade made from fresh squeezed lemons has a definite quality advantage, but it's more expensive. At $0.25 a lemon and eight lemons to a gallon, it would cost $2 for each gallon. And you might be able to get prepackaged lemonade sold at the store for $1.50 a gallon.
~Interviewer: So how long will it take me to get enough money for the earrings?
You: Assume $10 in sunk costs - $2 for the pitcher and $8 for 800 cups. You then need to decide what to charge. If you charge 50 cents a cup of lemonade - which I believe is the upward end of lemonade stand prices - and it costs you $1 to make the cheapest gallon of lemonade, then you'd earn $3 on each gallon of lemonade sold. In four weekends in three months, you would need to sell 37 gallons of lemonade. Then you'd earn $111 dollars - enough to pay off the pitcher and cups. That's three gallons a weekend, or 24 cups of lemonade each weekend.
Interviewer: Does this sound reasonable to you?
You: So far, yes. But this is just the cost-structure. You must consider other factors as well. Who are your competitors? Are there other kids trying to sell lemonade at the same time? Are you located near delis and restaurants and street vendors who might sell competing beverages?
What is the demand for your product? Is it summertime, when people drink a lot of lemonade and are spending time outdoors, generating foot traffic? If not, you may have difficulty moving your lemonade. In cold weather, you might want to consider selling hot cider instead.
Where are you located? How many potential customers will pass your lemonade stand? Can you set up your lemonade stand at a sporting event, supermarket parking lot, or flea market, where many more people will pass your stand? If you just set up on the sidewalk, you may not attract the foot traffic to make those numbers. Indoor or sheltered locations are also preferable if the weather turns bad.
You have a competitive advantage - you're young and cute. You may get business from people who approve of your young entrepreneurial actions. At the same time, lemonade stands have a reputation for relatively poor lemonade, which may hurt your overall sales if you have competition.
Do you have any subsidies? That is, would your dad be willing to cover your start-up costs - the pitcher, the cups, and perhaps the cost of the lemonade. This would perhaps permit you to offer better-quality lemonade.
Consider your advertising. You'll need a big sign to call attention to your stand. You can rely on your parents for free - I assume - word of mouth.
You should also consider offering another product besides lemonade. Perhaps selling cookies or brownies, in addition to the lemonade, might increase your profits.
You should consider other revenue-generating activities as well. If you are 14, a paper route is a possibility. You may also be old enough to babysit.
It's also possible that you might be able to choose another pair of earrings, or find the ones you want on sale. This would lower your income requirements.