Entrepreneurs and the incentive of profit
What is the primary reason that people go into business for? Profit! But what is it!?
Profit is the difference between sales revenue and costs of production. But what are they!?
Sales revenue = Price x Quantity
Costs of production = Total costs (all the fixed costs (rent, utilities, telephone, etc.) and all the variable costs (raw materials, transport costs, etc.))
Entrepreneurs are often comparing possibilities, looking to decide which product offers the best incentive – i.e. can generate the biggest sales revenue for the smallest cost of production (we have previously looked at profit maximisation and sales maximisation before – recap!)
We can look at profit as an incentive for entrepreneurs from two angles:
- Customers are willing to pay good prices for products that they really want – e.g. Apple invented tablets and have first mover advantaged and dominate things as a result.
- The possibility of charging a good price creates prospects of profit for the entrepreneur, the ‘profit signalling mechanism’ comes into play and attracts businesses to that market – e.g. lots of businesses jumped into this tablet market as it was highly profitable, such as Blackberry, Asus, Samsung, etc.
In a capitalist economy, businesses therefore have an incentive to study customer needs and tailor their product to people’s preferences (i.e. be market orientated and do their homework – carry out good market research!). Are they going to be proactive (and attain first mover adv) or be reactive (and be attracted to a market but be competitive and try to be the best. Again it boils down to ‘be first or be the best’.
Successful entrepreneurs tend to be very hard-working (the typical UK entrepreneur only takes 7 days of holiday a year!). They are motivated by the chance to earn more for their hard work by setting up on their own. Remember though, there is always the RISK that they will make no profit at all, or even a loss! Statistically an entrepreneur in the UK has a 1 in 2 chance of failing within their first 2 years of trading. We’ve all seen businesses appear on our high street and very quickly disappear as well! Profit simply compensates the entrepreneur for carrying out the associated risks of running a business – it is a very simple incentive/motivator. But some entrepreneurs set up shop for reasons beyond profit.
Most entrepreneurs would like to say that profit was not their only motive. We can summaries the non-financial motives below:
- Self-actualisation - achieving a dream/ambition
- Creativity - creating/producing something unique! The satisfaction of seeing their vision becoming real is the driving motive.
- Satisfaction - of getting things moving, creating and achieving deals that lead to more business.
- Independence - being your own boss, a big attraction for independent minded people! Also, in the age of the internet, it is very easy to work from home and run a successful business via your laptop!
- Ethics and green considerations – an increasing number of entrepreneurs want to do the ‘right’ thing. Their businesses are centred on providing environmentally friendly goods/services. E.g One Water is a business that builds water pumps in African villages.
- Social entrepreneur – achieves benefits for society. Their main aim is to further social and environmental goals. Duncan Goose, who created One Water, would come under this heading.