“The value which the workmen add to the materials, therefore, resolves itself in this case into two parts, of which the one pays their wages, the other the profits of the employer upon the whole stock of materials and wages which he advanced.”
Let that sink in. Smith wasn’t just commenting on labor economics—he was describing the very foundation of entrepreneurship.
Far too many small business owners fall into the trap of treating their business like just another job. They work hard, keep the lights on, pay the bills, and maybe even take home a modest income. But here’s the rub: if you’re only making enough to cover your wages, you’ve essentially created self-employment—not a business. You’ve traded the security of a job for the uncertainty of ownership without the compensation that justifies the risk.
Think about it. As an entrepreneur, you likely invested not just money but your time, energy, and emotional capital into starting your business. Maybe you dipped into savings, maxed out a credit card, or passed up a cushy 9-to-5 job to follow your dream. That’s risk capital—an investment. And like any investment, it should earn a return.
Smith’s framework helps us understand what a healthy business should generate:
Labor Wages – Your compensation for the work you do.
Operating Costs – Covering your materials, rent, marketing, and so on.
Entrepreneurial Profit – A return on your invested capital and risk.
The third one—entrepreneurial profit—is where many business owners fall short. They price their services to cover costs and wages but not for the return they deserve. That’s like a landlord charging rent that just covers the mortgage, but not any profit. Would that make sense?
Why Pricing for Profit Matters
Underpricing is common in the small business world. Whether due to imposter syndrome, market pressure, or a fear of losing customers, entrepreneurs often sell themselves short. But if your prices only cover your time, you’re not building wealth—you’re just getting by.
Consider these questions:
Does your pricing model factor in a return for your entrepreneurial risk?
Are you building equity or just generating income?
If you had to replace yourself with a manager, would the business still be profitable?
You deserve to be compensated not just as a worker in the business but as the visionary who built it.
How to Shift Your Pricing Mindset
Calculate Your True Break-Even – Don’t just include wages and expenses. Add a percentage for your desired return on capital/risk.
Benchmark the Market – Understand what your competitors charge—but don’t race to the bottom.
Communicate Your Value – Customers pay more when they understand the value you bring. Invest in telling that story.
For more insights on pricing and value creation, check out all our posts on Pricing Concepts at SteveBizBlog.
Are you building a business that pays you like the investor you truly are—or just giving yourself a job with extra stress?
