124. Irene Ng: Designing New Consumer Experiences in the Era of IoT

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Value-as-experience is an insight from Austrian economics. Value is not inherent in objects or even in services. Value is not derived from functional use, but is the good feeling the consumer experiences during consumption. Consistent with the Austrian understanding of the market as a process, value is a process. It plays out in time in the consumer’s mind. Consumers learn what is valuable to them in the process of choosing and consuming and evaluating.

These insights add some under-appreciated marketing considerations to a firm’s capabilities, such as an appreciation of situational traits and of the importance of context. Irene Ng provides the E4B podcast audience with a set of contemporary tools to design new experiences and even create new markets in the era of the “Internet of Things” (IoT).

Key Takeaways and Actionable Insights.

To design experiences, start by thinking in terms of ecosystems.

Ecosystem thinking pays attention to how knowledge, people, technology, processes and the environment are connected and work together. Systems awareness is becoming wider and wider, observing the interaction and value creation among multiple service systems. Consumers’ value experience occurs within a service system, and thus the service ecosystem worldview is increasingly important for entrepreneurs in an ever more connected, digital and data-driven world.

The subjectivist viewpoint is fundamental to designing consumer experiences.

We are taught from the youngest age to have an object view of the world. We describe situations using nouns: for example, in a room, there is a chair and a piano. Meaning and purpose are identified via the nouns we use. Economics shares some of this noun-based view of the world: assets, knowledge, material things, property.

For the design of consumer experiences, verbs are more relevant, not just as descriptions but as connections between objects and people and behavior and thinking. If I play the piano or drink tea, I am connecting objects and people in action. The world becomes a matrix of verbs and interactions. What individuals do impacts on objects and on other individuals. Design becomes a matter of what a system of objects and people and connections and actions and flows can do.

IoT brings new capacities and new affordances to service ecosystems.

Irene listed 4 new capacities of IoT that contribute to new ways to design experiences:

  1. Liquefy information: A physical object’s information can be sent across space and time. When several information flows are combined for greater information density (e.g., from multiple objects in a kitchen used during cooking) we have more knowledge on which to base an experience design.
  2. Turn objects digital: Software and sensors embedded in an object give that object new capability. For example, a running jacket can communicate location and speed, measure temperature and heart rate, and provide programmability.
  3. Assemble individual objects into a service system: Objects and devices connected and working together exhibit abilities that they don’t have individually. A door lock plus a camera plus a tablet plus the internet can perform as a remotely monitored security system.
  4. Enable transactions between separate task spaces: A task network (such as cooking in a kitchen) can be linked to another task network (e.g., grocery shopping) and a transaction between the two enabled (deliver fill-up ingredients when inventory runs low).

Now a designer can think about a new set of affordances: properties of a system that show users what actions they can take. Ideally, the consumer will perceive the new affordances without the need for complex instruction.

Marketing changes its focus from consumers’ personal traits and segmentation to situations and contexts.

The design of an experience shifts from the use of objects to connected things with information flows in a system. A customer’s perception of the experience within the system may be affected less by their personal traits (as is often assumed in segmentations such as “early adopters” or “social approbation seekers”) and more by situational traits and context.

For example, the situation of “taking my morning coffee” affects an individual’s perception of how well a coffee mug meets their needs (how well does it fit under the spout of the coffee maker), along with a chair to sit in or a news service (paper or digital?) to read. How well do all these artifacts and services work together in this situation?

Similarly, context affects system perception. An individual might like a certain style of streaming music at home, consumed through a sound system while eating dinner, and an entirely different style for working out in the gym, consumed through a portable digital device and earpods.

The design of experiences considers situation and context, and can potentially accommodate a very broad range of people through personalization rather than cater to a narrow market segment.

The human being remains the best sensor in the system, and all design must support and enhance this role.

There may be a temptation for digital designers and technicians to become immersed in the capabilities of an IoT system and forget that it is the human who judges the value of the system through the experience it enables and supports. The human is not outside the system, but is the master sensor, providing both inputs, outputs and judgment. IoT systems provide support, using data to enhance the human experience. Empathy is still the designer’s number one tool to identify the market drivers — the dissatisfactions to be addressed — that underpin favorable human perceptions of the value of IoT systems.

Additional Resources

“Designing New Consumer Experiences in the Era of IoT” (PDF): Download PDF

“The Internet of Things: Review and Research Directions” by Irene Ng and Susan Wakenshaw” (PDF): Download PDF

“Service Ecosystems: A Timely Worldview” by Irene Ng (PDF): Download PDF

“Mimicking Firms: Future of Work and Theory of the Firm in a Digital Age” by Irene Ng (PDF): Download PDF

Value & Worth: Creating New Markets in the Digital Economy by Irene Ng: But It on Amazon

Entrepreneurial Economics Explained.

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There is a body of economic science that has identified entrepreneurship as the driving force of economic growth. 

The purpose of economic science is to discover and verify methods to achieve increased well-being for individuals, families and any groups they form or choose to belong to, such as communities and firms or collaborative networks and associations. Scientific process and results must be realistic, i.e. relate to the real world rather than to mathematical equations and models.

Economic science uses the language of means and ends: the science aims to identify the best and most appropriate means for achieving chosen ends. In the economics of individual well-being, the ends are not represented by so-called aggregate measures such as Gross Domestic Product (GDP – a measure of the total monetary value of finished goods and services produced within a country’s borders) or total employment. 

The end of this body of economic science is individual satisfaction, often identified via the concept of subjective value – subjective in the sense that the individual decides what is valuable and what they value. In this way, customers run the economy. Whatever they feel satisfies their needs and wants, i.e. what they decide is valuable, is what is ultimately produced. In this sense, customers create value – it isn’t valuable if they don’t say so. Economic growth means more of what customers feel is valuable.

Customers get help in value creation from the entrepreneur. It is the entrepreneur who studies customers, ascertains what they think is valuable, and undertakes a production process to deliver that value. Logically, they are producing for a future value experience, because production takes time. 

This is why the role of the entrepreneur is so pivotal in the creation of new economic value. Entrepreneurs take all the responsibility and all the risk in value generation. They bet on being able to identify customer preferences pretty accurately (they can never be exactly right) and then they bet on being able to assemble resources in the form of a firm to produce for that preference, and they bet that the preferences won’t have changed before they get to market, and they bet that they can get not only the product or service right but also the price, and they bet they can beat competitors who are rivalrously eyeing up the same set of possibilities. 

Economic science observes and recognizes this role of the entrepreneur. It’s not a matter of personality – anyone can be an entrepreneur. There is definitely a method to entrepreneurship, in spite of (in fact, because of) the uncertainty of betting on customers’ future preferences. The economics of entrepreneurship is not fueled by sources of finance like debt or equity, but by imagination. Entrepreneurial projects are built on the choice of which customers to serve and how to serve them, imagining a future world in which customers’ formerly unmet needs are now satisfied. Imagination is turned into the design of a business model, which is the mechanics of actually delivering imagined value to customers. Revenue is the feedback loop that tells entrepreneurs that they have offered something valuable, and profit is the feedback loop that tells them that they chose the right costs.

To embark upon and stay on the path of successful production for profit, entrepreneurs must embrace and overcome uncertainty. How do they do this? They act. They make a commitment. They get started on the project or business initiative. Having once moved into action, they begin to learn. They can never be 100% right, so some parts of what they do will go wrong, and be unsuccessful. 

The entrepreneurial firm learns what doesn’t work and what does, discards the former and does more of the latter. Business strategy is experimentation and learning, not multi-slide presentations and extensive spreadsheets. Agility – fast learning, fast adjustment – beats business school training.

Because of entrepreneurial exploration and experimentation to identify what works, the world advances – people enjoy more satisfaction and a higher standard of living, services and technology improve, and civilization advances. The world we live in is shaped by entrepreneurial economics.

One clear implication of this body of economic science is that there is no place for – and no need for – government economic policy. It can only get in the way of entrepreneurial exploration and experimentation. Governments extract value from the economy through their taxes and regulation, and then sometimes claim to redistribute it via subsidies and rebates. They claim to design policies such as what level of wages to pay, or the cost of imports, or the amount of market share any firm can have before an anti-trust suit. It’s all futile and, worse, damaging. In entrepreneurial economics, the role of government is to stand back, get out of the way, and marvel at the living standard enhancements entrepreneurship brings.

Academics call this body of science Austrian economics, because its early thought leaders came from Austria when Vienna was the commercial and cultural capital of the globe. Thinking in the Austrian way is helpful to entrepreneurial success, but, for economic growth, we don’t need to adopt the name, just the method.

123. Sergio Alberich on Capital Structure and Capital Flexibility

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The proper selection of a firm’s financial source does not guarantee its success, but the wrong one assures its failure.

Austrian capital theory delivers actionable insights for business. Austrian theory emphasizes capital’s economic role in generating customer revenue flows. Since these flows are variable, entrepreneurial capital must exhibit a capacity for agile and flexible combination and re-combination to keep revenue flows refreshed and current, Since capital structure plays an important role in entrepreneurial judgment, decisions, and action, it must support fast, flexible and unconstrained decision making. Businesses can benefit from their understanding of capital through this Austrian lens. Sergio Alberich helps the Economics For Business podcast listeners, and business practitioners in all kinds of businesses at all stages for their development, to Think Austrian in matters of capital structure.

Download The Episode Resource “Austrian Capital Financing” (PDF) – Download

Key Takeaways & Actionable Insights

Entrepreneurs designing a firm’s capital structure should view their choices through the twin lenses of ownership and control.

Ownership and control are tradeable assets for the entrepreneurial firm. In order to obtain capital financing, one or the other or both might be offered up by the entrepreneur or requested by the financier.

How will shared ownership play out now and in the future? Will ownership imply only a share in any future returns? How great a share is the entrepreneur willing to trade? What will it feel like to receive only a portion of the return the entrepreneur worked for? How much more ownership will be given up in future financing rounds?

Can ownership be traded without any loss of control over decision-making and future investments? Alternatively, how much control should be traded? A board seat? An investment committee? The financier wants the entrepreneur to be free to make the decisions for which he or she is best-informed and most capable, and yet wants to be protected from managerial error.

There are many factors that can stand in the way of capital flexibility, and organizational issues of ownership and control become paramount.

Debt and equity are the basic choices as building blocks of capital structure.

Debt and equity are basically different kinds of contracts between the individuals managing / operating a project and those funding it. Debt is a fixed claim with a known annual return to the debt holder. Typically, the debt holder has no control over management decisions and is not involved in managing the company (although there are some covenants that can be written to provide some distant control).

The return on equity for the financial investor is residual, after debt repayments are made, leaving entrepreneurs relatively free to allocate costs and direct operations. But equity holders typically hold voting rights, and can therefore exercise some control in some circumstances. They may also exert strong influence on management decisions based on relationships. For example, family and friends investors may exert special relationship influence.

There are some debt-equity hybrids — most notably convertible notes, debt that is convertible into equity at some future stage or event. The negotiation of this instrument brings more complexity to the ownership-control debate, while giving the entrepreneur leeway to consider issues of valuation in the future rather than at the current financing.

Entrepreneurs must also consider human factors, especially the number of people in the capital structure.

Another major consideration for entrepreneurs is whether to raise debt or equity from a few people or many (e.g., via IPO or a bond that hedge fund investors can buy). Raising capital from large numbers of investors creates categorically different situations for the entrepreneur. An IPO, for example, can not be a highly tailored instrument. Institutional conventions and regulatory rules impose many requirements about how entrepreneurs and their managers communicate, how they frame financial risk, and about the nature of widespread shareholder engagement they take on. Just think of the interaction of Elon Musk on Twitter, with the SEC, and with short sellers.

In general, the fewer the number of investors, the greater the operating flexibility for the entrepreneur. There are fewer people to convince when business seeks to make a major change, or to pivot.

Sergio Alberich outlined 4 levels of consideration for the financial investor providing capital to the entrepreneurial firm.

Level 1: How are the factors of production combined in the firm, and how might the combination change in the future? Elements of this level of consideration include the stage of business in its growth journey and the assessed maturity of its business model, industry, and competitive set; the nature of the business’s relationship with partners, suppliers, channels and customers; and the state of knowledge regarding product, service and market development.

Level 2: What is the nature and scale of cash flows now and in the future? Are there mature, reliable cash flows? Is one part of the business a drain on cash resources? Is cash coming in from investments for operating expenses (which are not really flexible).

Layer 3: What are the possibilities for returns? Both entrepreneurs and investors seek profit – not just accounting profit on the P&L but returns on equity. At an early stage, a company may worry about generating future cash flows and less about the cost of equity (in terms of sacrificed future returns) to finance growth. A more mature company with cash flows in the present pays much more attention to the cost of equity, and to cost of capital in general, seeking to preserve as much return as possible.

It is often the case that entrepreneurs give up too much equity in order to secure early stage venture capital funding, whether directly of via convertible loans. To keep the entrepreneur motivated with equity that promises future returns, it is best for them to deal with just a few investors who understand this motivation.

Organizational design is relevant, too. For example, a law firm with 100 partners, each of whom own 1 share, and limit their business model collaboration to sharing real estate costs and IT expenses, while effectively running 100 projects, might be creating a politicized nest of vipers. A partnership with shared equity in one business, where everyone stands to lose a lot if there is a bad decision, is likely to be much more collaborative, conducting a unified business, rather than acting as a co-operative of individuals sharing costs.

In the end, subjectivism in entrepreneurship prevails.

As we emphasized in episode #108 (see Mises.org/E4B_108), businesses perform best when entrepreneurs are free to make subjective decisions. The proper source of capital is one that most enables this subjective freedom, which may not be the optimum source based on spreadsheet calculations. Subjectivity and entrepreneurial judgement are not math. The best economic role of capital finance lies in helping entrepreneurs make better human subjective decisions. This is the essence of the means-ends calculation for both entrepreneurs and investors. Austrian economics gives by far the best guidance on this economic role of capital.

Additional Resources

“Austrian Capital Financing” (PDF): Download PDF

“Austrian School vs. Neoclassical School” (PDF): Download PDF

Can Capitalism Survive Beyond 2021? Yes! A New Generation Of Entrepreneurs Will Keep It Refreshed.

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Economist Joseph Schumpeter famously asked, “Can capitalism survive?” 

His next sentence: “No, I do not think it can.”

This was back in 1942, and socialism was in the ascendancy. It feels somewhat similar in 2021, given the economic policies of the Biden administration, and the money-printing activities of the Federal Reserve, the ECB and Central Banks worldwide. 

Yet the problem Schumpeter identified was not one of economics, but one of people. He thought that capitalism depends on broad popular support, but saw that it would breed its own enemies, and that its beneficiaries would fail miserably in defending the system that brought them wealth and comfort.

The most visible enemies of capitalism, in Schumpeter’s analysis, are intellectuals. Although he was an intellectual himself – employed as a university professor – he took an extremely dim view of the intellectual class. Intellectuals are a nuisance for capitalism. In Schumpeter’s phraseology, they lack the “firsthand knowledge” that only “actual experience” can bring, and so they are envious onlookers, purveyors of uninformed criticism.

The man who has gone through a college or university easily becomes psychically unemployable in manual occupations without necessarily acquiring employability in, say, professional work.… All those who are unemployed or unsatisfactorily employed or unsatisfactorily unemployable drift into the vocations in which standards are least definite or in which aptitudes and acquirements of a different order count. They swell the host of intellectuals … whose numbers increase disproportionately. They enter it in a thoroughly discontented frame of mind. Discontent breeds resentment. And it often rationalizes itself into … social criticism … [and] moral disapproval of the capitalist order. 

Capitalism, Socialism and Democracy, Joseph A Schumpeter

Capitalism creates sufficient wealth for the economy to support positions for intellectuals who do not produce, merely comment, and, as a result, the system comes under attack from those whose very occupations are made possible by the efforts of the entrepreneurs and capitalists who drive the economy in a ceaseless process of innovation, improvement and wealth creation.

But Schumpeter’s analysis goes beyond the commonplace observation that intellectuals are anti-capitalist. His argument is more complex: that capitalism’s success undermines the social institutions that protect it, creating “conditions in which it will not be able to live”.

Capitalism operates not primarily for the wealthy, but in the interests of the average person. Capitalism shortens their workweek, delivers leisure, excellent affordable and fashionable clothing, appliances of every kind, entertainment and education. This progress, in Schumpeter’s analysis, is the work of a minority: creative entrepreneurs who convert scientific discovery into items of pleasurable experience and valued benefits for customers. Capitalism enlists these entrepreneurial individuals of unusual talent and energy.

But these bold spirits become submerged. As capitalist corporations become bigger due to their success, they add layers of salaried employees – the “organization men” of capitalism – and the spirit of capitalism withers because these employees do not have the entrepreneurial spirit of founders and owners. These are the individuals who benefit from the system but fail to defend it from the intellectuals’ attack. These are the middle managers and bureaucrats within firms, accountants, engineers, systems wizards, marketing analysts, media manipulators, laboratory, technicians and associated technical experts who are paid and rewarded directly with the fruits of capitalism, yet don’t think sufficiently deeply about the system to develop an appreciation for the benefits it provides them.

Built-in Self-Destruction?

The self-destruction is built-in to capitalism in Schumpeter’s view. The system depends on general popular approval, which you’d think it would receive, given that capitalism improves the life of everyone who participates. However, there is a transitional element to the progress that capitalism brings, and it’s one with a detrimental effect. As the large corporations grow, they hire more and more administrators, drawing from a pool of individuals who, in the past, would have been entrepreneurial proprietors of smaller capitalist enterprises, what today we disparagingly call small business. Capitalism is, in this way, making progress that is self-destructive. Capitalism declines into administrative routine.

The perfectly bureaucratized giant industrial unit not only ousts the small or medium-sized firm and “expropriates” its owners, but in the end, it also ousts the entrepreneur and “expropriates” the bourgeoisie as a class which in the process stands to lose not only its income, but also what is infinitely more important, its function.

Ibid

And what about the leaders of the large corporations who perpetrate this “expropriation”? They come to believe that, in the era of big government, the best way to protect their interests is cronyism, a sort of business-controlled socialism in which the profits of the big companies are preserved, while the risks are socialized via legislative and regulatory “protections” enacted by the state.

A New Entrepreneurial Resurgence.

Schumpeter’s pessimism can be quite persuasive as one observes the decline of capitalism today into bureaucratic corporations integrated with an even more bureaucratic welfare state that promotes dependency over initiative, creativity and hard work. 

But his analysis is too one-directional and does not accommodate feedback loops. The corporate administrators and technocrats will become unfulfilled, bored and alienated. They will not accept that all they can expect is the wage that is paid to them for their labor hours. They will observe that the entrepreneur can obtain market rewards from many other sources, including capital from investors or loans from banks, and eventually returns on equity and on creativity. Entrepreneurship also opens up new streams of psychic and life rewards, from a sense of achievement to purpose and meaning, and the comradeship of working in highly motivated entrepreneurial teams. Life is better for entrepreneurs.

Capitalism has recently made new advances that reverse the trends that Schumpeter observed – what he called “automatizing progress”, i.e. taking the vibrantly creative entrepreneur out of the process of economic progress and substituting routinized work methods. Now, new forms of productive capital enable more individuals to choose the entrepreneurial route, by harnessing the tools of the internet, including open source and low cost software, networking systems to organize decentralized innovation, and newly capable ecosystems such as IoT. Entrepreneurs can become designers of new consumer experiences and of new markets. They can innovate by connecting things rather than building or inventing them. They can connect devices and sensors and software and data streams to personalize experiences for customers. It does not require the resources of a giant corporation, and it often does not even require a lot of financial capital (and, when it does, there are a myriad of new sources).

Today, it is far easier to seize the emotionally fulfilling high ground of entrepreneurship, and to reject the stultifying bureaucracy of corporate process and routine and hierarchy. People can substitute the joy of creativity and initiative for the alienation and insecurity of the cubicle and the spirit-draining scheduled meeting on Microsoft Teams. 

A new generation of entrepreneurs and their firms is arising and will defy the decay of the capitalist spirit that Schumpeter anticipated. 

122. Andrew Frazier on Running Your Business

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There’s a middle class of businesses that are the backbone of the economy. Professor Saras Sarasvathy coined that term, and we’re pleased to adopt it.

These businesses sit between the big corporations of the major stock indexes and the VC-funded gazelles and unicorns of Silicon Valley and Silicon Hills. The watchwords for these backbone businesses are duration and durability. They last and prosper because they are well-run, following the entrepreneurial method.

Entrepreneurship is usually portrayed from the perspective of ends: identifying unmet customer needs, creating new and innovative solutions, taking them to market, making a success.

That’s all true. However, there is another perspective that comes from actually running a business, ensuring that operations are smooth and efficient, monitoring daily cash flows and monthly P&Ls, and managing people’s performance.

Often, running a business requires an intensified focus on means. Cash flow, operations, employee performance — these are means, and running a business is a science of managing means. Business advisor Andrew Frazier helped us focus on means in this week’s Economics For Business podcast.

Key Takeaways & Actionable Insights

Knowledge is an entrepreneurs most important means. Accumulate it purposefully (but not by losing money).

The more you know, the more you grow. That’s a mantra from Andrew Frazier. He advises thoughtful accumulation of knowledge. One way to learn is to lose money — you learn what doesn’t work, and what not to do. Avoid this form of learning by purposive knowledge gathering. This includes truly knowing your purpose — at least part of which is to build the business resiliency that delivers durability and duration.

Knowing your numbers is a critical component of durability and duration, and of shepherding your means.

In his advisory and consulting roles, Andrew encounters many business owners who don’t know their own numbers intimately — their daily cash inflows and outflows, the precise identification of fixed and variable expenses, the condition of the P&L and the balance sheet. Some, he says, fear the numbers. They delegate accounting to an outside service, or even to an internal “back room” employee. Don’t delegate “knowing your numbers” to anyone. Be on top of them every day. They tell you your means.

Sales and marketing are the most important means of lasting business growth, and not necessarily expensive.

There is no business without the sales and marketing activities that identify the right customer niche and tell your story to those customers in a credible, warm and persuasive fashion. Many business owners and entrepreneurs see sales and marketing as an expense to be incurred only if there is cash leftover from other variable and fixed costs that take precedence. This is wrong-way thinking. Sales and marketing are job #1.

Hiring employees is the biggest change you will make to your business and to your role in it.

You want to hire employees for the growth of your business. As you do so, you are changing your business. You change its structure: it now needs organizational design. You change your role: you are now a leader. You change the business’s operational flow because it now needs detailed processes and systems. You change the culture: it becomes more indeterminate and therefore requires more of your attention. You stop working in your business and start working on it.

Duration and durability require sacrifices from you.

One aspect of the entrepreneurial ethic is personal sacrifice today for market reward in the future. Sacrifice is part of your means. You’ll work harder and longer hours. Your business and social and family lives will become inextricably intertwined. Your business will become your identity. Realize this and embrace it.

A lasting business requires an exit plan.

A business that prospers over an extended period needs an exit plan for its owner or founding entrepreneur. This can range from an IPO or sale to an acquirer to leaving it to your kids or turning it over to employees. Whatever the case, the owner needs to plan ahead for exit, almost from the beginning. For example, if you have a professional services business, what will make it saleable when you want to exit? Is there asset value over and above revenue flow? Will customers stay after you leave? Are your kids even interested?

Additional Resource

“Running Your Business” (PDF): Download PDF

Visit Andrew Frazier’s Website: RunningYourSmallBusinessLikeAPro.com

Running Your Small Business Like A Pro by Andrew Frazier: Buy It On Amazon

“The Masterpreneur Playbook Summary” (PDF): Download PDF

The Austrian Business Model (video): https://e4epod.com/model

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Value Mapping: New Thinking About Business Model Innovation.

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Only recently have business thinkers come to identify business models as a locus of innovation. In past eras, a business model was synonymous with monetization: how businesses generated revenue from customers. The concept of a business model came from the logic of goods and services: design and sell what the customer wants to buy.

Today, such a direct route to revenue is less assured. Famously, Google offers the world a search engine which is much used and generates no direct revenue. Revenue comes from advertising, which is an indirect property of search, and wasn’t even included in Google’s original proposition..

Today, as entirely new fields of business begin to open up, such as the unprecedented scope of service systems enabled by the connected devices and information streams of the Internet Of Things, a new breed of business models is about to emerge. How will businesses think about designing them?

The breakthrough paper by Professors Per Bylund and Mark Packard, Subjective Value In Entrepreneurship, gives the answer: business models will be designed through a subjectivist lens.

What exactly is entailed in subjectivist design? First comes the understanding and deep internalization of the concept of subjective value. Value is a feeling that comes from experience. For the consumer or customer, value is a learning process with clearly identifiable stages. Customers first encounter a value proposition from a potential provider of service, and must decide whether or not the proposition suggests a possibility of a valuable experience. If not, they’ll ignore it. If yes, they’ll go on to make a relative assessment of the potential value compared to available alternatives. Those alternatives may be similar services with a different mix of attributes, including price. Or the alternative might be an offering in an entirely different commercial space, in the case where the customer feels that, from a total expenditure perspective, they can only make one purchase and not two. Or the alternative might be doing nothing, and keeping money in the wallet for some future buying occasion.

If the purchase does take place, the value process is still nowhere near complete. It continues for several more stages. The buyer consumes the product or service (perhaps once or perhaps on several occasions or over time), noticing a usage experience as they do so. After the fact, they evaluate the experience, compared to what they anticipated and compared to what they perceive may be an alternative future or replacement experience. The customer now has new experiential knowledge to use the next time a value proposition is made to them.

The important mindset change for business model designers is to fully understand that all value is subjective. They are designing an experience for another mind, that of the customer. The method to use is Value Mapping.

Value mapping is the route to sound business models because it reflects the customer’s value learning process. There are 4 phases of value mapping for business model innovation, and together they compose the design of a desirable experience for the customer.

Value Conceptualization

Value Facilitation

Value Experience Monitoring

Value Agility and Adaptiveness

Value Conceptualization

What new experiences are possible for the customer? Which of them are more desirable? How can we know, given that customers have never experienced them before? Value conceptualization is the empathic phase of business model design. The customer, at every point in time, is in a mindset that can be described in the phrase, “Things could be better if…..” They are not necessarily precise in this expression of dissatisfaction. And they can’t tell the business model designer exactly what new and better experience they are seeking. They’ll know it when they feel it. Therefore, the first lines drawn on the value map are imaginary lines. The business model designer uses imagination – tries to imagine what positive emotions of satisfaction the customer might feel in the future if their wishful thinking for things to be better were fulfilled. Designers must place themselves inside the mental model of the customer, see things and feel experiences as customers might see and feel them, and then run a new experience “script” through that mental model, and project what the resultant feeling might be. That takes a lot of imagination.

The imagination may even be expanded further, to begin framing new experiences for employees who might work on the new initiative, and for partners who might join a future value network. Perhaps there is potential new value for the community in which a new venture is to be embedded, and perhaps also for the environment. The aim at this first stage is to map as big a value pool as possible.

Since it’s unlikely that the designer will get it exactly right, it’s necessary to develop many imagined experiences and find ways for customers to give input as to whether the design is going in the right direction and nearing some kind of level of evaluation where the customer gives a “Yes” to the question of whether they perceive any value potential at all. At this point, the designer has made it to the first threshold.

Value Facilitation

To reach the next threshold, the business model designer must identify all the resources, functions and capabilities necessary to bring the potential value experience to the point at which the customer can purchase. This is a reverse design process. The designer imagines the experience the customer will have in great detail, then works backward to identify every detail of what it will take to deliver it. This requires systems thinking. What is the system, in all its detail, that is required for perfect experience delivery? Not just the final product or final service, but the assembly of all components and elements, a supply chain, a network of partners, a back room, a service capability, a sales and marketing capacity. Every item at every stage must be designed and assembled so that the value proposition can be delivered without fault on every occasion.

It’s a kind of value engineering. All the necessary parts must be in place, connected in the right way, all fully functioning and enabling all other parts, sub-systems and the system as a whole to function perfectly to bring potential value to the customer without any barriers or undue work required on their part.

Value Exchange

At this point, the customer buys or does not buy. The act of exchange – the customer exchanging money and other resources such as time – is often seen as the moment of value creation. If the revenue flows, it’s an indication of value realized. But this is wrong. Think back to the Google search service example. The exchange takes place when the customer types into the search bar, expressing the belief that a knowledge gap they feel can be filled by the service. When they receive a response and feel that their expectation was fulfilled, that is when value is created. No money changes hands. Nor is it merely a time-shifting of a revenue commitment, such as when a customer visits a doctor for a health consultation, knowing that there will be a bill for somebody to pay in the future as part of the health care payment system.

The exchange, whether accompanied by payment or not, is the pivot from the first half of the value map, conceptualization and facilitation, to the second half of the map.

Value Experience and Value Monitoring

The customer now has ownership or control of the value proposition – the product, service or relationship from which they feel they will gain a valuable experience. The actual value comes in consumption, but it’s not value-in-use but value-in-experience. It’s a 2-step process on the customer’s part: consume then evaluate. Use the product or service, note the real-time experience and then stand back and appraise that experience. Did it feel as satisfying as expected, or as desired? How did it measure up to other comparable experiences? How does it stack up against future experiences promised by competitors?

The service provider’s role at this stage is monitoring, and, if possible, measuring. In the value facilitation phase, the provider did everything possible to get to the point of exchange, and put the service in the customer’s hands. Now it is time to observe. In some cases, there might be the opportunity to interact, if the customer calls a service center or uses a service chatbot, but these interactions are more accurately part of the customer’s consumption than their value experience. They become part of the experience later.

The provider’s business model design should include the capacity for experience monitoring. This could be ethnographic observation. It could be real-time analysis of web usage patterns from which judgments of experiential feelings can be made (an abandoned shopping cart, for example, might be indicative of frustration with the checkout process). We are promised sentiment analysis in the future: real-time measurement of how the customer feels during consumption, via mood sensors or other devices. This will be a great development for business model designers, making the value monitoring phase speedier and better informed.

And if the Phase 1 value map identified potential new value for employers, partners, communities and the environment, the business model must also build-in monitoring and measurement for these value holders, so that the keeping of any value promises made to them can be ratified.

Value Agility

The complete value cycle takes time to unfold, and the world is changing as it does. The customer is acquiring new knowledge, both from the current exchange and experience, and from multiple other experiences occurring in the same time frame, both of their own and those of others whom they can observe. Prices are changing, the competition is changing, and service options and possibilities are changing. The service system is in continuous flux and change.

That’s why this phase of the business model is referred to as value agility. The service provider is receiving feedback from customers, new information from the marketplace and competitors, suggestions from employees, and new environmental data. In response, they are developing new ideas for improved value propositions, and news of these improvements needs to reach customers before they defect or identify better alternatives. The business model designer must build in this agility and flexibility. Nothing in the capital stack or the corporate procedures or systems or in business model execution can be so fixed as to prevent agility or even slow it down.

How does a business model designer build-in agility? It requires an appreciation of capital flexibility, of capital as a process rather than as a balance sheet entry. It requires organizational empowerment, so that the first receivers of input from customers are empowered to put it to work in those parts of the organizational structure that can make most use of it. It requires an embrace of change as the operating norm rather than as a complication to be resisted.

The Value Cycle

The four stages of the value cycle – conceptualizing, facilitating, monitoring experience and agility in response to feedback – are brought together in contemporary business model design. Revenue and profit emerge for the participants and partners in the value network, but they are not measures of business model effectiveness. That role belongs to value.