Over the last 17 years I have talked to over 600 different business owners. I always asked the same question when we start chatting. ‘Why did you choose to do’ so-and-so? Surprisingly almost all of them said the same thing. “I just love doing …….”. I learned over time that the best thing to get involved in is what you love to do most.
Now given this, one has to be realistic about how much you will earn doing what you do for a living. If you want to sell snow cones in Alaska, well, not such a great idea but if that’s what you want to do: Go for it!
I have heard about 40 different folks try to explain economic principles to me and others. Some were enlightening, others, well let’s just say they weren’t well read individuals. But the best one I ever heard was a basic economic concept story of prostitution. Never mind its illegal, we are talking about the economic principles involved and how they compare to your business model.
Simply put, the prostitute sells her body and her time for a given price. The price is negotiated as it relates to the John’s perspective and the existing market. If she is working a street with competition, the price for her time is lower because the buyer has a selection (competition). If she is alone, then the price can be higher and she can be more selective. There are many factors involved in price, they are as follows:
- Age – this one is interesting because most industries value older, smarter, and experienced workers. Some industries are willing to pay more for youth, examples include sports, the military, and high physical labor businesses such as landscaping, movers, etc. Overall, she has about a 10 – 12 year window to make maximum dollars. Naturally, the younger her age the more likely she is appealing to the buyer.
- Looks – body shape, complexion, hair style, clothing, and hygiene all have a bearing on the price
- Confidentiality – this one is interesting because the John’s don’t want to be identified. Other than the obvious, many males are willing to pay more to maintain that confidentiality.
- Acts – for her, it is important to know what type of acts is required. The more uncommon acts require higher compensation because of the performance risks and the nature of the situation. She is already vulnerable and an act requiring her to become more vulnerable increases the risk which in turn ups the price. Note the importance of this business element, increased risk requires a higher price.
- Recurring Customers – she is willing to reduce the price for her time if she knows that this customer is going to return for more service, especially if the service is regular and similar in nature. A returning customer provides security, reduces risk, and does not increase the confidentiality level.
Now what’s interesting is that all of the elements above exist in the small business world. The economic principles are exactly the same. Let’s walk through each one.
Body and Time – for the small business owner you give up your physical time to attend to the customer’s needs. Whether you sit behind a desk and process thoughts (lawyer, architect, accountant) or provide the physical aspect of interacting with the customer, you still have to give up your body and time. The question here is: What is the value of your body and time?
Age – this is generally the inverse of the prostitute, most folks don’t care what you look like, they value your experience and knowledge. I can assure you, if that brain surgeon was the ugliest person on the planet but had performed over 1000 successful surgeries, you want him if you need brain surgery! For most industries, they are willing to pay a premium dollar for those with more experience and knowledge to perform the services as employees. Think about engineers, doctors, contractors, and even those dreaded politicians. Experience counts.
Looks – your appearance, your facilities, the type of equipment you use, even the color scheme has a bearing on the customer’s willingness to pay more. Almost any business operation with more up to date characteristics is prized above the outdated operations. From the folks that service your home to who your local government hires to fulfill the community’s needs. Looks do indeed have a bearing on the final price. Caveat here: if you are the only game in town, then this has very little bearing on the final price. Actually I would say it has no bearing on the price. Think about it from the John’s perspective, if there is only one available, then the looks are irrelevant.
Confidentiality – from the lawyer to the accountant, confidentiality is important to the customer. Nobody is interested in having their dirty laundry or financial woes or successes known by others. So the higher the level of trust, the higher the price charged to the customer. Although we don’t pay the clergy directly, the institution does pay the clergy and in most cases they are paid well. One of the reasons is the confidentiality aspect of the services they provide.
Acts – the actual service or product you provide all has a bearing on the price you charge. For those services/products requiring licensure, then the price is higher. If they are rare such as crawling into a manhole to clean out a system, then the customer is willing to pay more. Most folks will not crawl under their own house, so how much are you willing to pay to have someone crawl under there to inspect?
Recurring Customers – anytime you can get the same customer to buy from you on a regular schedule and they pay their bill, that’s what makes business go. Your time input decreases due to the learning curve, you can count on consistency reducing marketing costs, and it allows you to negotiate with others for better terms because you have a customer or a set of customers you can rely on for regular revenues. The risk factor goes down, you can hire without trepidation, and the customer provides referrals. The key word is security. There is value in having security.
Note how the above elements in the economic transaction are exactly what the prostitute deals with on a day to day basis. All of the above elements exist in every business transaction. You have to think about them when developing your business, ‘What do I want to do?’ How do these elements affect me? What do I give up in the form of body and time? What kind of experience is required? How shall I present myself as a business? What level of confidentiality do I provide? What exactly am I doing or providing? What kind of customer do I want or need to be successful?
If you remember the economic elements of this age old profession and apply them to your business, it will be easy to answer the questions. Now you are ready to take the next step – developing a business plan. Knowledge is Power.
If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org. I would love to hear from you.
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To help you get started in business, I suggest following up this article with the following articles:
Do I Need a Business Plan? – To get started in business, everyone says that you need a plan. Well, do you? Find out if you need a plan and how to go about developing a plan.
Research Your Business Plan – Part I – Once you have determined that you need a plan, it is time to start researching and documenting the plan. Find out the next set of steps and how to go about developing your plan.