63. Dusty Wunderlich on FinTech Financing: Entrepreneurs Helping Entrepreneurs

Key Takeaways and Actionable Insights

FinTech sounds like the latest over-hyped tech bubble. But it has a much more fundamental importance in entrepreneurial economics. It brings entrepreneurs the best-priced capital in the marketplace. Dusty Wunderlich explains on the Economics For Entrepreneurs podcast #63.

Consider these findings from a 2017 report from the G20 Global Partnership For Financial Inclusion, titled Alternative Data: Transforming SME Finance.

Access to financing remains one of the most significant constraints for the survival, growth, and productivity of micro, small and medium enterprises (SME’s).

Digital SME finance, using alternative data, offers an extraordinary opportunity for addressing…this problem.

The world’s stock of digital data will double every two years through 2020. Every time SME’s and their customers use cloud-based services, conduct banking transactions, make or accept digital payments, browse the internet, use their mobile phones, engage in social media, buy or sell electronically, ship packages, or manage their receivables, payables and record-keeping online, they create digital footprints. This real-time and verified data can be mined to determine both capacity and willingness to pay loans.

A rapidly growing crop of technology-focused SME lenders are putting the use of SME digital data, customer needs and advanced analytics at the center of their business models, setting forth new blueprints for disrupting the SME lending status quo.

The report refers to 800+ innovative digital SME lenders. Colloquially, we can refer to them as FinTech.

Dusty Wunderlich, a subject matter expert and seasoned investor in the FinTech field, discusses this lending landscape.

FinTech Ecosystem Map

Entrepreneurs need capital in the present to deliver goods and services to consumers and customers in the future.

Entrepreneurs take scarce resources and apply them to what they believe the consumer will want at a future date. In order to do that entrepreneurs need capital in the present so they can deliver on those goods and services to the consumer in the future in the hope that their forecasting is correct.

That’s why entrepreneurs need to understand capital financing and modern day capital markets.

Access to capital has historically been difficult and expensive. Today, it’s becoming easier and less expensive, aided by the digital data revolution referred to in the report quoted above. It’s important for entrepreneurs to be familiar with the new field of FinTech and how to navigate it.

Dusty Wunderlich suggests that entrepreneurs map out the financing alternatives on the axes of their own business stage versus the cost of capital.

Cost of capital refers not just to interest rates and fees, but to the requirements that lenders can impose on entrepreneurial borrowers. At the very earliest stages, “friends and family” lenders, angel investors and seed stage venture funds will all require equity stakes, and ratchet up those stakes via deferred interest and debt-to-equity conversion requirements. These early investors perceive themselves as taking a high amount of risk, and the start-up entrepreneur typically has little or no collateral or leverage in negotiation. The best negotiation stance is to generate competition among investors with the quality of the customer value proposition and the business plan and revenue model.

Fintech financing is now available at the earliest of entrepreneurial growth stages.

Today, from the very outset of the business journey, start-ups and small businesses can access a range of financing types – debt, convertible notes, equity and SAFE’s (Simple Agreement For Future Equity) – via crowdfunding platforms like nextseed and others like it. Marketing your business to investors on platforms like these taps into your existing skills in marketing and social media, and doesn’t require you develop capabilities in pitching your business that you might not have mastered.

As you advance along the growth curve, FinTech options expand and may offer you the best-priced capital on the market.

As a result of the expansion of FinTech based on alternative digital data sources, the potential for connecting your particular business to a well-matched and well-priced source of capital is greater and more precise than ever. Dusty cited a couple of examples like Kabbage (where, incidentally, entrepreneurs can currently get help with PPP loans). There are several more. Because of the competition in the FinTech market and the quality of the information they utilize, capital from these lenders is well-priced – probably approaching Mises’ originary rate of interest, Dusty observes, in a testimony to Austrian free market principles.

It is when your business represents the least risk to lenders that big banks offer their high-requirements business loans.

At a later stage of your business journey, banks will lend money against collateral and will impose additional onerous requirements and loan covenants. The entrepreneurial embrace of uncertainty is not for them! Bank financing is at the top when it comes to cost of capital and is to be approached cautiously. It is with bank financing that entrepreneurs become entangled with the negative effects of Federal Reserve repression of interest rates, that can mislead them into making incorrect investment decisions.

The cost of bank financing for mature companies revolves more around terms and covenants than interest rate percentage points. Banks are transactional, whereas entrepreneurs are operationally minded. This can cause a lot of friction if covenants, terms and triggers are not properly set. Entrepreneurs must pay attention to every detail in the loan contract. Great businesses can be ruined because of draconian covenants and triggers banks put into their loan contracts.

Indicated action: Entrepreneurs will be well-rewarded for fully investigating and understanding the emerging world of FinTech and digital SME finance. Be sure to calculate the full cost of capital – not just interest rates – and weigh all options.

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62. Mark Packard: The Customer’s Value Learning Process

Innovation and marketing are the two most important functions of entrepreneurial business: bringing innovative new goods and services to market, and convincing customers of their value. On the E4E podcast, we are providing a detailed exposition of Professor Mark Packard’s deep analysis of exactly how customers arrive at, and act upon, their assessment of value.

Key Takeaways and Actionable Insights

Mark’s insights provide entrepreneurs with a powerful tool to fine-tune value propositions for maximum marketplace results.

Value is a process.

Value is a feeling that the consumer experiences. To arrive at that experience, consumers actually follow a process — a learning process. This process is actively conducted by the customer — it’s conscious, subjective, sequential, and continuously fine-tuned. There are 5 process steps:

  1. Predicted value (what will the experience be like?)
  2. Relative value (comparing that predicted value to existing solutions)
  3. Exchange value (putting a price on willingness to pay for the solution)
  4. Experienced value (what was it actually like?)
  5. Value assessment (comparing experienced value to predicted value).

In other words, it’s a cycle.

The first overview of the cycle was presented in E4E episode #44. Next, in Episode #55, Mark provided two tools for entrepreneurs to manage the process: the High Knowledge Customer Tool and the Mindfulness Tool. The first one ensure entrepreneurs talk to the right customers to gather knowledge, and the second helps them focus on the right things.

In the current episode, Mark helps entrepreneurs to identify and gather the right data for the management of the Value Learning Process.

Value Ethnography

Ethnography can sound a bit like it’s the activity of explorers in safari suits. But it’s actually the most modern data collection method for the new digital economy. The term is used to describe the process of embedding oneself in the situation that is being studied — in this case, the actions the customer is taking, and the decisions and choices they are making, regarding your value proposition and your business. Why do they do what they do? Why do they choose how they choose? Can they even explain it to themselves? In many cases, the answer is no. Ethnography doesn’t attempt to ask for an explanation or accept the one that’s given. Ethnography observes — it’s a journal record of behavior. And today, ethnography can be conducted via video and clickstreams as well as physical presence. The data streams are rich and deep.

Mark’s lesson to entrepreneurs is to be constantly observant, to watch and monitor what customers do, how they act, what they choose. At every step, ask them why they did what they did. But they might not be able to explain. Some actions may be made without too much thinking. Some may be habit. But, Mark explains, “The reasons are embedded in the behavior.” The reasons people do the things that they do and make the choices they make are embedded in the behavior itself and the observant entrepreneur is able to dig out those embedded reasons.

Therefore, there’s a next step after ethnographic observation: interpretation. And Mark offers us another tool to help us.

City Of From / City Of To

Customers are engaged in a continuing journey. Where they start from is their current experience. Call this starting point “the City of From”. And they are always dissatisfied, always seeking something better, aiming at some improvement in their experience. Call this new experience “the City of To”, the destination they want to reach.

The tool Mark calls “City of From / City of To” maps the customer’s journey. To understand where they are now, the entrepreneur as observer collects data or deduces findings about the customer’s current place — current experience – and their reason for being there. Then the entrepreneur as analyst projects the customer’s desired future experience in the City Of To. Why would they move there? Why do they like it better? What was wrong with the City of From and how is it fixed in the City of To?

Download the CITY OF FROM / CITY OF TO Toolkit at Mises.org/E4E_62_PDF.

Attraction Why am I here? Why did I move?
Doubts What am I unsure about here? How are my doubts overcome?
What Changes Why is this better than before? What will be even better in the future?
Dissatisfactions What is missing here? What is better here?
Motivations to change Why should I move? Why did I move?
What would I say? The case for moving. The justification for having moved.

Empathy and The Customer Knowledge Generation framework.

The core skill for entrepreneurs in the analysis of the customer’s experience in the value learning process is empathy — being able to feel what they feel. In fact, as Mark points out, that’s literally impossible. You can’t feel another’s feelings. But the brain is capable of amazing feats of imagination and projection — what Mark calls counterfactuals. You can imagine what another person feels and project that feeling onto your own experience so it’s as if you are experiencing it yourself. You create a mental model in your own mind of the feelings in theirs. It’s a skill you can practice and one that is crucial to unraveling the customer’s value learning experience — to experience it the way they do.

Mark provided a framework that helps you with sharpening your empathic diagnosis capability: Customer Knowledge Generation. There are 5 components, which are actually 5 pitfalls to avoid:

  1. Talk to the right customer — “high knowledge” customers who can truly help you understand value experiences that are most relevant to your business success. We discussed these high knowledge customers and how to identify them in episode #55.
  2. Make sure these customers are intrinsically motivated to share the right information. Don’t pay them to participate in your ethnography, but make sure they know there’s something in it for them – a better experience in their future.
  3. Assess your own motivation to learn — you must be sincerely committed to the learning process. Don’t “just ask”. Don’t just go through the motions.
  4. Be conscious of and actively seek to identify distortions in the information you are receiving from the customer — misstatements, inexact vocabulary, information loss, inattentiveness, looseness in communication. Interpret with rigor.
  5. Be aware of your mental model — the experience that you are imagining the customer is having — at all times to make sure it remains congruent, and that the information you are receiving is important and fits the model.

Next: changing the customer’s mental model.

If you practice ethnography and Customer Knowledge Generation, you’ll allocate a lot of time and effort to construct a model in your own mind of what the customer is experiencing in theirs. The next step is to flip the switch. You are going to adjust their mental model. You want them to consider your value proposition. That’s new for them. They don’t yet have a model of what it feels like to choose your service, or what it might feel like to experience it in the future. They haven’t formed a picture of relative value versus other options. You must provide them with that new model. We’ll talk about that in the next episode with Mark.

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61. Yousif Almoayyed: Good Business Ethics Are Simply Good Business

Austrians maintain an active focus on business ethics. Why? It’s simple self-interest. As entrepreneurs, we want to succeed; individuals can’t do it alone, we need to co-operate with other people.

Key Takeaways And Actionable Insights

In continuing transactions and exchanges between two parties, each side must benefit, otherwise, one side will not be open to further transactions in the future, and will terminate the relationship.

Ethical entrepreneurs focus on the long term for their entire business ecosystem.

That’s why Henry Hazlitt (in The Foundations Of Morality) emphasized morality as simply a focus on the long term: what he called The Long-Run Principle. Entrepreneurship always maintains a focus on the long term (i.e., beyond individual one-time transactions), and good business ethics is simply good business sense in this perspective. Transactions that are mutually beneficial are ethical.

Yousif Almoayyed extends this perspective to the entire business ecosystem: customers, employees, vendors and suppliers, and the community in which a business operates.

Good ethics generate sound business relationships.

As we have emphasized many times, business and brands make a promise to their customers. Those customers must have faith that the promise will be kept. Otherwise there will be repercussions such as termination of contracts, and loss of faith in the future relationship. Customers place more trust in a company that demonstrates a higher level of ethics. They’ll pay more and seek to extend their relationship. Banks will extend better terms.

Unethical behavior destroys trust and co-operation and has a very high cost. As Stephen Phelan pointed out in Episode #56, relationships built on trust operate faster with less friction. Trusting partners co-operate better. Information flows unimpeded. Losing these advantages is highly damaging.

Your good business ethics are important to the individual development, personal commitment and productivity of your employees.

The company that is ethical will be able to develop the potential of its employees to a higher level. Ethical entrepreneurs give their employees freedom to take initiative, within the norms and cultural guidelines that emerge naturally from collaborative attitudes.

The tactics of implementation can vary by level and role. Front line workers are paid for their production; managers are paid to enhance the productivity of those they manage. Incentives are aligned via wages and salaries and profit sharing so that every employee is looking out for the best interests of the company. When they are, employees think beyond their immediate task; when they do so they are thinking at a higher level. An ethical firm develops employees’ sense of the bigger picture and finding their highest and best role; employees know they’ll be rewarded for doing so.

It’s not appropriate to try to incentivize employees by paying them above market rates. It’s the wrong incentive. They will become defensive and self-protecting; they’ll avoid hiring people to work in their department who might prove to be smarter and more productive, because they become fearful of protecting their over-compensation, knowing they can’t reproduce it elsewhere in the market. Ethics gets compensation right.

Does your firm prize clever, capable people? Does management keep their promises to help employees develop and flourish?

Ethics are fundamental to a business’s relationship with its community.

This comes up often in the context of environmentalism. But ethical business is not the powerless victim of activists. Ethical business is honest and truthful about the costs and benefits of specific business activities – and there are always both when viewed from a community perspective — and weighs them carefully in the balance of long term perspective. There is an ethical logic to the market — if business manages resources well and for the net benefit of all, it will be awarded with more resources to manage.

You don’t need to be a trained ethicist. Just ask yourself some simple questions about any firm. Whether you are an employee, a manager, an owner, a shareholder or a stakeholder, you can ask these questions to ascertain the ethical nature of any firm — including your own.

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What’s A Good Entrepreneur To Do? Make A Profit, Thereby Serving Society In The Best Possible Way.

A January 2020 Forbes Magazine article titled “Why Doing Good Is Good For Business” clearly left out critical information: who is the good or bad entrepreneur? According to the author, good entrepreneurs are doing good if their primary objective is not to make a profit. And bad entrepreneurs are doing bad if their primary objective is to make a profit.

Basically, the author suggested that, to be good, a business should not pursue profit and, along with it, customer satisfaction. Ignoring the profit motive is deemed more important than the entrepreneurial reward of profit that comes from providing a service or product to customers who demand value. The bad entrepreneur is only concerned with making money, surviving in the market, and serving consumers. The bad entrepreneur pursues charitable deeds but not at the cost of what consumers demand. You see, being the good entrepreneur only helps a few concentrated groups but ignores the diffuse effects of many consumers, profit rewards, and potential failure. What is the good entrepreneur to do?

Let’s be honest. If the entrepreneur is not primarily motivated by profit, what happens if the business fails or can no longer service its customers due to profits invested in nonmarket activities that do not serve them? Unfortunately, there is a public perception that does not allow entrepreneurs to pursue a profit motive only, because others must choose for them—they call them good entrepreneurs. They call them good if they subordinate the profit motive to lofty, nonmarket, eleemosynary endeavors outside the scope of producing consumer value.

Professor Walter Williams wisely advised: “Profit guides resources to their highest valued uses as determined by people’s wants and desires.”1 Should entrepreneurs disregard the profit motive, making it secondary, and replace it with nonmarket motives? What would the effect of nonmarket motives be on the entrepreneur and the customer? When Coca-Cola changed its formula, said Williams, it was because of customer preference. Consumer preference was a warning sign to the potential loss of profit which brought back the original formula! Actually, good entrepreneurs focus on nonmarket motives—endeavors that are outside their division of labor in the first place. Ludwig von Mises once asked, “What is the good entrepreneur to do?”2

Shouldn’t the primary goal of entrepreneurs be to remain profitable so that, at a minimum, they are able to run their businesses and continue production, which then serves customers who choose to buy their products and services? Don’t entrepreneurs deserve to earn a reward for taking risks and putting their livelihoods in jeopardy to procure materials and goods to bring to the market? To eliminate the profit motive is to ask entrepreneurs to provide their vital service to consumers perhaps at a higher cost than they would otherwise. Profit is not only the reward given by satisfied customers, but is also a market signal of what to do more of and what to do less of. You see, the good entrepreneur, not having a profit motive, primarily focuses on motives that do not serve customer needs.

Market Customers Are Ignored

For example, your local pizzeria owners generally do not know you personally, but they know that you want hot delicious pizza. That’s their motive. Fortunately for pizzeria owners, there’s a reward for preparing that pizza for you. But if your local pizzeria owners do not make a profit, they will no longer exist in your community to serve pizza. End of story.

Therefore, we must ask: are good entrepreneurs, motivated not by profit but by nonmarket issues, likely to be successful and stay in business? Why is there an expectation that entrepreneurs run a business without a profit motive? They can’t. The good entrepreneurs are nonmarket oriented and put profits into nonmarket endeavors aside from producing value for their customer; these nonmarket motives are placed before the profitability of the business and a value-added process for customers.

Having a motive other than profit poses a critical problem. Mises asked, “How can a conscientious entrepreneur persuade a banker or a capitalist to lend him money if he himself cannot see any prospect of a profitable return on his investment?”3 The good entrepreneur, in fact, must ignore customers and forgo profit for nonmarket activity, in which the entrepreneur has a great chance of failing due to financial instability and loss of customers.

What Is the Good Entrepreneur to Do?

When the profit motive is taken off the table as a primary objective, there are several consequences. There ceases to be a way to reward the entrepreneur over and above the costs of doing business. Someone must bear the consequence if the business isn’t profitable and struggles financially. Customers leave.

Good or bad entrepreneurs, if they wish, can be motivated by other things than profit. But the question remains: what cost are they willing to pay to keep the business from failing? Surely, there are other motives that can come into play, but does the entrepreneur who decides not to do what’s in vogue become a bad entrepreneur? Survival of the business comes first; serving consumers comes next. If good entrepreneurs fail, who subsidizes them? If bad entrepreneurs survive and continue to provide value, are they not doing what they are rewarded to do? Bad entrepreneurs can choose what they want to do with their profits, as long as it does not interfere with market exchanges and customer satisfaction.

There is nothing better than to support one’s community and do good deeds for others. However, we must examine a simple fact. If an entrepreneur is not driven by profit first, then a profit-driven entrepreneur will come along, do things better at a better price, and obtain a greater market share. This is a fact of the market process. The problem comes when the good entrepreneur is asked to be guided by nonmarket activities, as Mises stated. He said that entrepreneurs are viewed as “hard and selfish” if they are guided by a market position instead of a nonmarket position and asked, “What is the good entrepreneur supposed to do?”4

Market Consequences

How soon we forget that, as Mises noted, it is “consumers and not the entrepreneurs that determine the direction and scope of production”? In order to serve customers, entrepreneurs must maintain a profitable operation—this is what a good entrepreneur does. If the entrepreneur chooses to disregard the profit motive, customers will not be served. If they are served, at what cost?

Some expect to interfere with an entrepreneur’s business endeavor to pressure them to provide nonmarket outcomes. Basically, they expect the entrepreneur to run a business without a profit. But the same people demand products and services from the entrepreneur. The nonmarket profit motive does not work.

The entrepreneur operates in a market economy, where consumer signals regulate the production or service offerings of businesses. Is it feasible to ask that entrepreneurs use their privately-held resources for nonmarket endeavors notwithstanding the profit motive? Should I ask my favorite pizzeria owner to not be motivated by profit, yet demand he keep making those hot, yummy pizzas? Whatever motive the entrepreneur decides to assume, there surely will be a market consequence.

Nonmarket pressure groups demand that good entrepreneurs only be motivated by what they think is important or the latest nonmarket trend. The fact is, as individuals, entrepreneurs can decide what motivates them and pursue the means to that end. The main concern should not be whether the entrepreneur is primarily motivated by profit or not, but the diffuse effects on customers. Further examination is needed as to the costs in the market.

How do motives that are not based on profits bring results in a market economy? Does a secondary motivation other than profit negatively affect the survival of the good entrepreneur and/or consumers? If so, then we can assume that “the wishes of customers can be safely ignored because there’s no bottom-line discipline of profits.”5

Are you the good entrepreneur?


  • 1.Walter E. Williams, More Liberty Means Less Government: Our Founders Knew This Well (Stanford, CA: Hoover Institution Press, 1999).
  • 2.Ludwig von Mises, Interventionism: An Economic Analysis, ed. Bettina Bien Greaves (Irving-on-Hudson, NY: Foundation for Economic Education, 1940).
  • 3.Mises, Interventionism.
  • 4.Mises, Interventionism.
  • 5.Williams, More Liberty Means Less Government.

Photo by Brooke Cagle on Unsplash

60. Rory Sutherland: How The Austrian Approach Helps Entrepreneurs Multiply Value. It’s Alchemy.

In episode 60, we are joined by Rory Sutherland, Vice Chairman of Ogilvy, one of the world’s largest advertising and marketing agencies, one with a long tradition of customer insights. Please listen to the podcast, in which Rory as a raconteur delivers great fun and entertainment as well as helping entrepreneurs to think more incisively about customer motivations.

Key Takeaways and Actionable Insights

His latest book is titled Alchemy, which explores how a deep understanding of subjective value can lead to outstandingly effective creative marketing. But he doesn’t use the term subjective value – instead, he calls it psycho-logic. One of the key planks in Rory’s argument in favor of psycho-logic is that it deliberately follows the path of Austrian economics, and rejects the mainstream economists’ unrealistic assumptions about the quantified logic and cold, rational calculation of homo economicus.

Rory Sutherland's Black Box

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There is a “black box” in the human mind between objective reality and behavioral choices. The “black box” is subjective value.

According to Rory, only Austrian economists understand that when entrepreneurs change the way a product or service is described or change the form of attention, they are able to synthesize new value by making customers think differently about any offering.

He offered many examples. One is the way we consume technology. Mainstream economists view technology through the reductionist lens of efficiency: it replaces human agency and reduces work. Austrians – and advertising agencies – view technology through the humanistic lens of augmentation: it makes us better, gives us alternatives and improves our satisfaction. Changing the form of attention changes perceived value.

Another, even more human, example was about our perception of waiting. If waiting (e.g. in a hospital waiting room) is viewed as delay, it is frustrating. If it is viewed as special treatment (“We want to assign you exactly the right specialist, so please step into our special waiting room until the doctor is available”) it may be valued as privileged attention.

The shallow kind of quantified logical explanation mainstream economics gives to customer choices completely freezes out the question of subjective perception and emotion. Austrian economics offers entrepreneurs a significant advantage in a better way to think about the mind of the customer – the “black box”.

Psycho-logic elevates the subjective value of meaning over objective reality.

One of Rory’s insights is that “How we behave and how we feel is much more a product of meaning than it is of objective circumstance. Our behavior is mostly driven by emotions, and our emotions are mostly driven by meaning rather than objective information.”

One of the consequences is the endorsement of the Austrian method: to observe behavior and work backwards to deduce the emotions and the subjective meaning and individually-specific contextual perceptions that drive behavior.

You can’t rely on market research because a large part of the reason customers might give for their behavior is post-rationalization. Rory says that customers change their behaviors for emotional reasons, and rationalize them with logic later.

The Austrian method of individual analysis is gloriously scalable for entrepreneurs as a result of its fractal characteristics.

The behavioral science of searching for individual motivations in the emotions of subjective value might appear to be unscalable. But the opposite is true, says Rory. “It’s gloriously scalable. It’s kind of fractal.”

In this context, fractal refers to the existence of similar patterns recurring at smaller scales that can be infinitely self-similar and iterative in processes and over time. Fractal describes what otherwise appear to be partly random or chaotic phenomena – like the spontaneous order that Austrians discern in economic systems.

For entrepreneurs, says Rory, it is possible to learn lessons from the psycho-logical analysis of one customer that can be applied to many more. You can learn something in one business sector and apply it to another, or learn something in a huge organization and apply it to something tiny.

Context is important to customer choice because perception tends to be comparative versus absolute.

Rory is a student of evolutionary psychology. He quotes Don Hoffman in The Case Against Reality: Why Evolution Hid The Truth From Our Eyes: Evolution doesn’t care about accuracy, it cares about fitness. We’ve evolved to develop perceptual mechanisms that are not necessarily designed to present objective reality to us, but to help us survive. The great mistake mainstream economists make is to think humans are trying to optimize the world as though we are engineers or physicists – trying to map objective reality onto behavior – without understanding the “black box” that comes between perception and behavior.

Customer perception price is a relevant example of comparative logic and context at work. Is Nespresso expensive coffee? Yes, if it is compared to Maxwell House or Folgers. No, if compared to visiting a Starbucks store. The frame of reference for comparison changes the behavioral outcome. There is no objective standard.

The most important comparison customers make is with their own expectations.

Rory cited the effect that Yelp restaurant reviews can have on the expectations of prospective diners who read them. If they choose to go to the restaurant, their expectations are shaped in such a way that the actual experience is evaluated against that expectation, not in any absolute way. Depending on a customer’s frame of comparison and their expectation, the same experience can be perceived as brilliant or terrible.

Entrepreneurs can manage customer’s expectations and frame their comparisons. That’s often the role of advertising and marketing. These provide the context in which customers can appreciate and enjoy their experience. Until both the good and its communication are optimized, there is no value.

When entrepreneurs shape the customer’s expectations through advertising, marketing and branding, they are not just adding value for the customer, they are multiplying it.

According to Rory, “Marketing doesn’t add value, but multiplies it. (And bad marketing, by  the way, destroys it.)” The good – the product or service offered by the entrepreneur – and the perception of it are interdependent and we should use multiplicative dynamics not additive dynamics. If you have a product but you can’t work out a way to sell it, you have an invention, not an innovation. Marketing takes invention to innovation, or, as Peter Drucker said, the only two things that create value are marketing and innovation.

Rory described it this way: “Entrepreneurs can discern what people want and find a really clever way to make it, or discover what they can make and find a really clever way to make people want it.” Either or both are fine as paths to profit.

Brands are an excellent technique for expectations management. They represent an exercise in what Austrians call uncertainty and Rory calls outcome variance. Brand preferences are smart behavior on the customer’s part because of the trust and reliability that they perceive in their favorite brands. Choosing an alternative might risk  missed expectations.

In the multiplicative dynamics of marketing, entrepreneurs must aim high.

“It’s perfectly possible that what is constraining the United States’ economic growth is actually the level of the speed at which consumers’ tastes can change rather than the speed at which producers can manufacture exciting things for them to buy.’

It’s rational for customers to follow habit, to do what others do, in order to avoid outcome variability – to maintain their expectations. There is a cost to early adoption of new innovations.

Therefore, entrepreneurs seeking new customers must pay attention to multiplicative dynamics to elevate customers’ value expectations to a sufficiently high level that they will change their behavior. As Curt Carlson said, this requires an innovation to offer a 2X to 10X better experience.

Because of multiplication of perceived values, Rory advises that it is often effective to focus marketing on one aspect, or one feature, of an offering so that it becomes the key multiplier. It might be the camera on an otherwise industry-average smartphone, or the Uber feature that manages the expectation of when your ride will arrive.

Experimentation and iteration are important tools in the entrepreneur’s effort to unlock psycho-logic. Counter-intuitiveness is crucial.

Because value is subjective and entirely contained in the customer’s mind, it’s hard to unlock. That’s why entrepreneurs are the drivers of economic growth. Entrepreneurs, says Rory, do not have to appear logical to everyone else.

Entrepreneurs’ freedom to make counterintuitive bets means that, when they succeed, they’re disproportionately successful, because they represent a biased correction mechanism.

Rory cited James Dyson as a counter-intuitive entrepreneur: “Who needs a $7000 vacuum cleaner?”

Experimentation and iteration are the right technique to get to the successful outcome. And there is nothing more joyful  than when a final iteration succeeds!

The language of magic and alchemy is appropriate to describe the entrepreneurial process, subjective value, and the management of expectations and perception.

Mises recognized it. (See Ch XVI Prices Section 5). Rory Sutherland captures it in his book, Alchemy: The Dark Art And Curious Science Of Creating Magic In Brands, Business and Life (Buy It On Amazon).


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