We Must Want Better Things.

Customers, not corporations, dictate what’s valuable. This is the new reality of business, a complete inversion of the mental model for creating value.

The old model was inside out. Firms designed products, services and value propositions, pushing them to customers for consumption. Design, innovation, production and marketing were corporate functions. This was the concept of the business model: get all of the elements right and a flywheel effect begins. Customer feedback was an afterthought, to be dealt with later.

Businesses are just beginning to understand that their mental model must be inverted. Indeed, Charlie Munger, an expert on mental models, urged us to “invert, always invert”.

Today, his wisdom is applied on the grandest possible scale.

The first inversion is to understand that customers create value. Firms do not. Value is an experience, felt by the customer. Without the customer experience and the attendant emotion, there is no value. Economists have a way of breaking value down into its constituent parts, including exchange value (how much the customer is willing to pay now in expectation of future value) and usage value (customers’ actual experience of the product or service in use, and whether the experience meets, exceeds, or falls short of their expectation). In either case, there’s no value without the customer playing the key role.

When we talk of businesses creating value, we’re making a mental model error. Businesses can facilitate the customer’s value experience by offering products and services that meet their needs and are better, cheaper, more convenient or in some way preferable to that customer at that time compared to those offered by competitors. Value facilitation would be the more precise term, but don’t expect it to catch on.

What is catching on, however, is the inversion. Hanken School Of Business calls the inversion Customer Dominant Logic (CDL):

Customer-dominant logic (CDL) is used as the conceptual underpinning, meaning that the customer, rather than the service provider or the service system, is at the centre.

Value formation is in large part hidden from the service provider because it is embedded in customers’ activities and experiences.

Value emerges for the customer primarily as a result of customers’ attempts to fit the provider’s service offerings into their other activities in order to achieve their tasks and goals.(See Note 1 for study reference)

The second inversion is consequent to the first. The organizational model for the corporation must be inverted. The old model is a hierarchy of authority, with the CEO and the rest of the C-Suite at the apex, where they conduct activities to predict and control the future, such as strategic planning, resource allocation and budgeting, as well as all the rules of so-called human relations management and bureaucratic rules governing process and operations. Far, far away, in terms of authority and influence and freedom to act, are the front lines where there is the messy possibility of direct customer engagement and real-time knowledge gathering. These are the people and functions and services where there is actual interaction with the customer. Often, they and the knowledge they generate are far removed from the organization’s apex.

The inversion is to change the organizational concept from a hierarchically layered management structure into a living system, a network where every node is interconnected, equidistant from the point of view of omnidirectional information sharing, and of equal contribution to the purpose of customer value creation. The living system model focuses on flow rather than structure – especially how value signals flow from the customer to the firm, and, within the firm, how the signals are processed into innovation projects, service improvements, better communications and multiple ways to build new value propositions for customers to consider.

The customer as authority.

In this new model, there is no hierarchy of authority inside the firm. The customer has all the authority. Only the customer determines what’s of value to them. They are the evaluators. They define their own needs and wants – what economists call subjective value. They bring innovations into being. They decide what new things are well-received in the marketplace.

This realization is fundamental. Customers are the reason the world has nicer and better things. Think of today’s automobiles. The reason they are so beautiful, efficient, comfortable and functional is because customers insist. Back in the day, Henry Ford is supposed to have said about his customers, “If I had asked them what they wanted, they probably would have asked for faster horses.” In other words, they couldn’t identify the innovation, but they could identify what they wanted – to get from A to B, and to improve the speed, comfort and costs of doing so, including the burden of managing, handling, stabling and cleaning up after horses. By wanting better functionality in getting from A to B, customers brought the Model T automobile into being.

The same logic applies to, for example, comfortable airplane travel – faster speeds, more comfortable seats, in-flight meals, and all the rest. These and other features evolved over time following Orville and Wilbur Wright’s first powered flight. Orville and Wilbur had no conception of this evolution – customers demanded it.

You might have complaints about the standards of airlines today. Maybe you find that the seats are too narrow and too close together; maybe you don’t find the in-flight meals palatable; maybe the airport experience is too stressful for you. You are the authority on the standard of quality.

Customer responsibility

With authority comes responsibility. As customers, we must never settle for less than we want. We must insist on experiencing the quality we expect and demand. If we don’t, we won’t get it. Because the entrepreneurial value creation process operates as a response to customer-expressed needs. If customers don’t insist, the innovations they want and prefer won’t be developed.

In other words, we must demand better and nicer things.

Why, for example, are the companies that make up “Big Food” still manufacturing sugar-dense candies and cereals, and ultra-processed foods that can have negative health effects for their customers? Why do we continue consuming alcohol when it, too, can be so bad for our health, including but not limited to its carcinogenic effects? Why do we expose ourselves to “forever chemicals” in products we consume? Why do we tolerate poor service and broken promises from manufacturers, service providers and marketers? Why do we tolerate the declining and decaying civic infrastructure we face every day?

It is up to us as customers and consumers to demand better and nicer things. We have the control and the authority to do so, but only if we exert them fully. In those moments where we worry about America’s declining economic capacity and productivity, we must contemplate the role we play as customers. Capacity declines when we don’t insist on its improvement. Civilization declines when customers let it.

Don’t silently tolerate any level of quality that is below your expectations. The economy runs on customers’ and consumers’ expectations. But it can only do so when those expectations are expressed and communicated. Continue to insist on faster horses, so that you can, as a result, be offered a Tesla Model Y or an Audi Q8 or whatever meets your real need. It’s up to the manufacturers and service providers to translate your wants into innovations. It’s up to us to continue to press them and provide them with the interactive capital from which they build the solutions we demand.

Customer expectations drive progress, whether it takes the form of a better car, a healthier meal or a more vibrant society. By demanding excellence, we provide the spark for innovation. The customer voice shapes a better future. Keep pressing for it.

Notes

(1) Revealing business customers’ hidden value formation in service. Tore Strandvik, Kristina Heinonen and Sanna Vollmer. Journal of Business & Industrial Marketing. DOI: 10.1108/JBIM-11-2017-0259.

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Learn the practice of customer-led value creation and innovation here.