Sunday, 10 July 2011

The Widget Maker - A story.

Gerry made widgets. He loved making widgets and so did his team of widget makers. He loved widgets so much, he even called his business 'WidgetsRUs'. The only thing Gerry loved more than widgets, his wife and kids excluded, was cold hard cash.

Being a smart man, Gerry charged £X each per widget and then slapped a trailing charge of between 1% and 2% a year on each widget he sold, depending on the widget. (Gerry sold a whole range of different widgets - each type designed to do something slightly different).

The only thing that cast a cloud over Gerry's happy world was having to deal with the people who bought small amounts of his widgets. He didn't mind the people that placed massive orders so much, it was more the little buyers that used to ring him up for only 50 widgets at a time that annoyed him.

Indeed, he had once been known to yell down the phone at a startled little buyer, "What do you think this is? A 10p pick and mix store!"

He could have hired a secretary or an admin person but, quite frankly, it wasn't on the top of Gerry's agenda.

In fact, every time a little customer rang to place one of their little orders, Gerry and his team rolled their eyes and pulled a face. Of course, they answered the phone and took the order but they still felt a bit miffed that their widget making had been so rudely interrupted.

Eventually, Gerry hatched a cunning plan: "I know," said Gerry grinning, "lets only sell our widgets, in bulk, to a few big players and let the little buyers buy from them."

Gerry put his plan into action but still the little buyers kept troubling Gerry and his team with their miniscule orders. The little buyers were under the misconception that it would be cheaper to buy their widgets direct from the manufacturer, which is generally true in most businesses.

One day, Gerry had a brainwave: "I know," said Gerry, "lets hoik the price of our widgets up by 5%. But we'll only stick the 5% onto those pesky little buyers."

Gerry's wife looked puzzled and felt sure he needed a week in the sun. Gerry explained that from now on:
  • he would only sell his widgets to the little buyers at the 5% premium price - no discount.
  • he wouldn't add the 5% premium to the big boys' price.
He hoped the little buyers would get the hint and start to buy their widgets from the big boys. No longer would he be troubled by the little buyers irksome phone calls. If the big boys were flogging his widgets on his behalf, he wouldn't have so much paperwork and admin to contend with. Even better, the big boys might even do a little advertising on WidgetRUs's behalf. They could even entice the little buyers by selling Gerry's widgets at less than Gerry was willing to sell them at.

The big boys thought it was a super idea and soon widget distributors with names like Widget Platforms, Co-Widgets and Widget Supermarkets were springing up. Not only did they stock Gerry's widgets but they also stocked widgets from Clive and Tony, who owned competing widget companies.

The little buyers soon caught on that they could get their widgets cheaper from one of the widget distributors.

Gerry was happy because his phone rang less and he effectively outsourced a large chunk of his sales, admin and marketing. He was so happy that he agreed to hand over a chunk of his trailing fee for each widget to his distributors.

The big boy widget distriubutors were happy because the little buyers were effectively redirected to them. In addition, they got to tell the little buyers that they could sell the widgets to them at a discount price to what the widget manufacturers, like Gerry, would. In addition, they got a chunk of Gerry's trailing fee.

The little buyers were happy because the widget distributors seemed much more user friendly than Gerry, Clive and Tony were. They were also particularly pleased because they got a nice discount from the distributor, compared to Gerry's price.

Everyone was happy......... for the moment. But their were rumblings in paradise. But that's another story.


For those of you who are new to unit trust/ OEIC investing, this is pretty much the relationship between investment houses, fund supermarkets and unit trust/ OEIC buyers.