I understand what you're saying Ilan, and everything you say sounds about right on a factual basis. But just to keep the conversation going for the fun of it
If anyone isn't interested in the fascinating world of accounting and profit and loss statements in relation to Kitely daily operations... you can give this entire post a skip.
Realistically speaking: there is a difference between theoretical "can happen" transactions, and daily business reality. Specifically: sales of individual items do not directly correlate to overall P&L. Every grocer understands this: some items sell at a loss, some items sell at a significant profit, and it all comes out to overall positive profit for the business at the end of the month.
So for the sake of discussion, let's for a moment separate PayPal sales from KC sales and focus solely on KC sales. A customer buys say, US$100 worth of KCs. Those can only be sold by Kitely, and provides Kitely a real book asset of $100 cash. KCs are intangible value
. Since they cannot be sold (by decree of TOS) they do not have tangible value like L$ or Bitcoin. They can only be used to buy two things: Kitely-sponsored virtual goods and Kitely land. Both of these things are intangible goods
, requiring neither purchase of inventory, stocking, storage or maintenance. (For example, you're not selling groceries, which you have to buy from distributors and keep refrigerated in a high-overhead store with numerous employees.) Intangible goods. What you are in fact selling is a service. There are costs involved, but these are relatively minor compared to a brick-and-mortar store. (Thus the wondrous age of online business.) These virtual items don't even have the overhead of selling an item on Amazon, since Kitely doesn't have to purchase the inventory to begin with, doesn't have to store it, box it or ship it. Kitely product is virtual goods
with comparatively very low cost of doing business.
There is of course expense involved in providing virtual services. There is Ilan's and Oren's wages (both of which are fully justified and essential), the cost of the servers (and we all know Amazon charges through the nose for their services), and sundry other expenses (an office to work out of even if it's your home, electricity, ISP fees, local equipment fees, software, etc). All businesses have such sundry expenses. Presumably the majority of those expenses are paid entirely from your lead product: land sales. Kitely Market doesn't factor in at this point.
When KCs are used to pay for land, it's not a "virtual" payment. In such case the KCs convert instantly from virtual "Monopoly money" and take on real value, because they represent real money that has already been paid to Kitely... a kind of promissory note. Kitely accepts those KCs, the value they represent then becomes fully Kitely's property (income), those KCs are "removed" from the grid, and Kitely is now free to use the money paid for those KCs to pay whatever expenses need paid. If the business is run well and properly, at the end of the month there is money left over after expenses, due to the initial real-dollar sale of KCs at a profit. The idea of course, it to take in more in payments than the company's expenses (including wages), and then some. Basic accounting concepts applied to every business-- including virtual economies.
Of course, not all land is paid in KCs. A lot of land is paid for via PayPal. Even at Israel rates, the PayPal fee is less than 5%,leaving 95%+ of all cash land payments for business expenses and profits.
So let's apply these concepts to Kitely Market. We'll ignore the concept of SL Market (which has been publicly announced to be highly profitable), or Markets on other grids, which are fueled by other currencies (which are profitable... or those currencies wouldn't exist). We'll look at KCs exclusively. Whether spent on land or Market, KCs are initially purchased by customers. This adds to Kitely's cash assets. The company has sold intangible KCs for real money
. That money is an asset: income. When someone spends those KCs on Kitely Market, the merchant gets 90%, Kitely gets 10%. There are no real goods involved, no expense in physical production. The only expense is server space, net fees and market maintenance. Yes, if an employee managed Kitely Market, that wage would be added to the expense list. But "If an employee were hired" is irrelevant, because Kitely doesn't involve an employee in this process. One of the bosses does the work.
It is a long-standing business principle that "the owner cannot count his time as an expense". That concept is legally recognized by the U.S. Internal Revenue Service. It is taken for granted that a business owner's time is an "essential part of conducting business" and has literally zero monetary value.
So there is zero employee expense in running Kitely Market. Such is a non-factor.
Since KCs are intangible, cannot be "spent" by the merchant (except for land and virtual products from KM), and the real-cash value of those KCs are held by Kitely perpetually, any KC purchase
on Kitely Market is also intangible and does not affect the existing profit levels. Realistically speaking, a KC-based sale has near-zero overhead cost. (Servers may be expensive, but when averaged out over tens of thousands of sales, the cost-per-sale is negligible.)
Kitely does use PayPal, and that incurs fees. In this case those fees are under 5% of the total sale. (Let's use 5% just as a nice round figure.) Some items on Kitely have a low price. But since (to my understanding) the customer pays the .30 transaction fee, that fee is covered regardless of the size of the sale. (If the customer purchases several items at once that fee is spread out among those items.) This leaves us with the total item selling price, PayPal's fees, and Kitely's server expense in producing (delivering) that item.
So someone pays $5 for a Market item. Kitely's cut for that purchase is $1 (20%). The PayPal fee for that purchase is 5% of $5... or 25 cents. This leaves Kitely with 75 cents profit. Since there is zero production fee (no raw goods, no inventory purchased), the amount that Kitely retains is pure profit... to be used to pay for essential things such as server fees and misc overhead (which as mentioned, is minimal on a per-sale basis).
If someone only purchased a $1 item, Kitely's take is 20 cents. PayPal's fees are .05, leaving Kitely .15 profit. So no matter what the price of the item, items sold on Kitely Market earn profit. There is no such thing as a "loss item" that incurs negative profit. (A possible exception is perhaps a very low cost KC item that has high-data size and is delivered to another grid-- an uncommon thing). Both PayPal and KC sales should almost always
So with all Kitely sales added together at the end of the month... how can Kitely Market be a loss-factor? It is near pure-profit with no other expense than server costs, bandwidth and PayPal fees. The PayPal figure is stable and predictable, and can thus be extrapolated. If Kitely sells $1000 in PayPal-payment items, company cut after PayPal fees should be US$150. If Kitely sells $1000 in KCs... the immediate sales profit should be $100 (10% of the sale, made via pre-purchased KCs, less a ~5% PayPal fee, so about $95+ profit). But since Kitely charges more in KC value than PayPal price, their overall profit on KC sales would be fairly equal to PayPal sales. Those KC sales are not "no profit" sales; people paid for those KCs to start with.
So 80% of KC sales go to merchants. That is a non-value transaction. The KCs started out as "Monopoly money" and remain so after the transfer. Those KCs can be used to purchase Market items over and over and no value is gained or lost. But each time a new Market transaction occurs, Kitely gets 10% of that sale... so those KCs are whittled down 10% per sale and become real-profit for Kitely. Eventually Kitely gets almost ALL the KCs... which it sold in the first place. Left-over KCs take on final full value if they are used to pay for land... at which time their real-purchase value is fully converted on the books to Kitely profit, and the KCs themselves "sunk" to virtual no-existence. These things take place on a daily basis, many times a day.
So when one puts the numbers to it, if anything it would seem Kitely Market would supplement land sale income, not the other way around. Of additional benefit, Kitely Market draws customers to Kitely itself, which is a primary function of Kitely Market.
If Kitely Market is viewed as a loss-item needing to be supported by the grid... I would humbly suggest that this is a result of not viewing Kitely Market according to universally standardized accounting methods. KCs are sold, they are converted to virtual
(non-real) goods at zero production cost (thus 100% profit less PayPal fees of less than 5%), with the sales of the KCs being real cash profit purchased exclusively from Kitely. Business conducted properly, there is no way PayPal fees would suck down any more than 5% of KC sales. If they did, PayPal could not stay in business because nobody would use them. Similarly, if server fees suck down all Market profits... I'd say one is using the wrong server company.
No offense, not arguing... just discussing basic accounting and business operation principles. If Kitely Market isn't profitable (to the average of 15% of each sale, which imo is quite good ROI), I would have to ask out of sheer curiosity "why and what's going wrong?".
Am I off at all in the above observations? Evidently not:
ilan wrote:... we only net around $100 for every $1000 of Kitely Market sales, which is hardly worth our time..."
$100 per $1000 is 10% net, on every sale, every day. Are Kitely Market sales so low that doesn't come to a sizeable figure? There are corporations that would give an eye tooth from each executive to have that kind of ROI. There are stockholders of corporations who hope to net 10% per year
on their investments. Honestly, I think what's going on here is an issue of perspective and perception, not of real life profit and loss issues. Unless Kitely Market sales are so low it's not even worth running the Market... 10% daily net is excellent
. I'll bet Etsy and Amazon wishes
they could pull that kind of daily net.
I hope no one minds this discussion. It's total curiosity as to how Kitely functions and how we as residents can help it function even better... which is a request Ilan regularly makes during weekly meetings and on these forums. There's no telling who might come up with a ground-breaking idea that can make Kitely even more stable and profitable. Such observations help improve Kitely all the time... even if initially they're a bit uncomfy.