The Myth of Rational Man, Head Shop Edition

The NYT runs a fun little column on small business, “You’re the Boss”.  The column this week is about a head shop (a shop for cannabis accessories) in a small college town in the South.  The numbers are shocking – on a revenue of $1M in 2012, the owner is pulling in roughly $400,000.

This is amazingly profitable for a small business.  For a small retail shop, gross margins of 50% are pretty darn good.  Gross margins are the profit on every single item you sell, purely the retail price minus the cost of acquisition.   After the cost of rent, the cost of holding inventory, and above all the costs of staff, you’re doing great if you make 10% in pre-tax profits.  If this is at all indicative of comparable head shops, the money is fantastic.

It’s a reminder that the best money is and continues to be in the slightly distasteful.  Head shops are basically the sweet spot.  It’s quasi-legal, with the occasional risk of the police giving you trouble.  Fantastic customer loyalty.  But the main thing is that it’s distasteful and embarrassing for a nice middle-aged suburbanite with an accounting degree to run a head shop.  If you feel no such embarrassment, that gives you market power because of your quasi-monopoly.

The ultimate upshot, as always, is that homo economicus isn’t real.  We know that shame and embarrassment are economically significant.  It’s right there, in the accounting ledgers of a 4-day-a-week head shop pulling down profits that would make Goldman Sachs blush.

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