The Epic Calling Of The Entrepreneur.

/0 Comments/in /by

Many of us feel the pull of contributing to something “bigger than ourselves”. It could be a cause, a charity, a movement, a great project. It could be mentorship in a collaborative organization. Some people even claim that working for the government qualifies: representing (or regulating) the people.

But doing something “bigger than ourselves” does not have to be interpreted purely as a collectivist principle (sacrificing the rights of the individual for the common good), nor as altruism (living for others and not for oneself).

Almost 250 years ago, Adam Smith pointed out that it is not out of benevolence that the butcher, the brewer and the baker provide customers with dinner. Rather, it is out of self-interest. Which is an 18th century way of describing the entrepreneurial ethic of service.

Ethic of service

In an entrepreneurially driven market, customers – by buying or not buying, repeat purchasing or not, subscribing or not – determine what is produced. To be successful, businesses serve customers. They spend an enormous amount of time and money to understand customers and their preferences and needs, and expend all of their resources in an effort to meet those needs in the way that gains approval. Customers are rational seekers of betterment – they buy what will make their lives better, from their own perspective. They seek happiness. That’s what entrepreneurs deliver: better and happier lives.

The reward for utilizing today’s resources in ways that generate the greatest future improvement to society is profit. It is society’s way of pointing to where entrepreneurs should direct their best efforts. The ethic of service is sustained by reinvesting profit into more investments that benefit customers.

The epic calling of entrepreneurs is to join and accelerate this cycle of service, betterment, profit and reinvestment. 

Ethic of Innovation

The market in which customers have all the power is highly dynamic. The genius of customers is to be never satisfied. Betterment is their goal, and betterment never stops. There is always something better in the future, and always a new entrepreneurial market entrant or new R&D team to design it and offer it. 

The result of this dynamic is a continuous stream of innovation – new and better products, services, techniques, delivery systems, restaurants, food, payment systems, movies, TV’s, computers, smartphones, and V/R headsets. It’s better service at every store from the high street to the mall, and every dry cleaners and every nail salon and every gas station and repair shop, because innovation includes treating people better while serving them better. The dynamics of the market means that a customer who receives good service from any provider makes that the standard in judging all others. The momentum in the dynamic entrepreneurial economy is always forwards and upwards, towards betterment. 

Ethic of digitization

Digitization brings rapid betterment at an ever-increasing pace. It’s exponential. Entrepreneurs both initiate this phenomenon and harness it. Entrepreneurs brought us the internet and websites and search engines and e-mail and online shopping. They made almost infinite amounts of information available to us – certainly much more than anyone can consume or use. The digital economy brings abundance, the opposite of scarcity, which is what economists have told us is the norm in markets. Under digital abundance, all choices are going to become richer and richer, the cost we pay for things we value is going to become lower and lower (irrespective of what governments do to their fiat money – amazon.com is going to offer more and more choices and deliver better and better quality at faster speeds whatever the state of the dollar; we may pay with a different currency).

Entrepreneurs employing digital means to serve customers better will operate in this new world, pursuing and exploring the digital challenge: what are the boundary conditions of higher quality at lower cost? How can they bring digital betterment to everyone in the world? 

The emerging standard of digital betterment is that new services need to be 10X better than whatever is already in the marketplace in order to get customers to turn their heads, pay attention, and change from their current services, which are already excellent. The resultant compounding of improvement will rapidly elevate our life experiences.

And, in fact, digitization puts customers even more in charge – interactive technology brings more empowerment and control to customers than ever. We can compare prices more easily, benefit from the experiences of others who supply ratings and reviews, perform more tasks more quickly and easily, and orchestrate our own system of services and experiences in exactly the combinations we prefer. Customers will decide which digital providers they choose to allow into their lives. Only the best will qualify, and entrepreneurs will strive to be in that group.

Ethic of private property

It has been pointed out, most notably by Ludwig von Mises, that the entrepreneurial system requires acknowledgment and protection of private property to operate. Investors are free to invest in projects they judge to have the potential for high returns, founders are free to allocate their own time and resources to their innovative ideas, and customers are free to spend their own money on offerings that please them. This private property-based entrepreneurial system has brought the world increasing standards of living and quality of life for roughly 250 years, lifting billions out of poverty and squalor. Today’s entrepreneurs preserve that progress, despite the efforts of socialists to reverse it and replace private property with state ownership and bureaucratic control. No calling is higher.

Better world, better society

There is no shortage of pessimists who see the world through the lens of decline. Most of this is partisan politics, which is, indeed, descending to new lows. Some of it is politics combined with scientism (as in climate change fear). A good antidote to this pessimism is Hans Rosling’s book, Factfulness, which compiles hard data from impeccable world sources demonstrating the incredible, consistent and ongoing global progress in fields like life expectancy, child mortality, reduced incidence of poverty, growth in living standards, levels of education, elimination of disease and even reduced pollution. 

Entrepreneurship makes all of these possible via positive thinking, ideation, innovation, organization, and analytics. But, beyond these functions, entrepreneurship is the dominant force for good in the world. Entrepreneurs are optimistic (because they see the opportunities for progress), polite (because they value relationships), collaborative (to make relationships productive), law-abiding (the wrong side of the law is unprofitable), non-violent (violence is also unprofitable), and civil (because community building contributes greatly to success).

Epic calling

In Yu-Kai Choi’s book Actionable Gamification, which is an insightful analysis of human values, Epic Meaning & Calling is the core drive that is in play when a person believes they are doing something greater than themselves. Entrepreneurs experience that calling. Whatever their individual firm, invention, project or initiative, they feel the higher calling of betterment, and they derive part of their psychic profit from responding to that calling. They feel different and special because of their role and their contribution. 

And their contribution is, indeed, special. They are the drivers of the free market economy that raises everyone’s potential and attainment. They are the pillars of a collaborative culture of achievement and accomplishment. They are the creative catalysts of change. Society is better the greater the role and influence of entrepreneurs.

More of us should respond to the epic calling.

Thinking About Reducing Marketing and Advertising During This Down Economy? Perhaps You Should Think Again.

/0 Comments/in /by

These are interesting times for sure, with many small and large companies making hasty decisions to cut back and, in many cases, to cut out of their budget, the most competitive market tool – advertising.

Companies that are in survival mode should not decrease their advertising spend in the short run. It is an error to assume that customers are not searching for information about a product or service that you can provide. While on the surface, it might seem clear-headed to eliminate marketing activities to protect your firm’s assets, but might we not forget that marketing in general and advertising, in particular, are, in the end, informational devices that drive revenues for the long-run? Everything has a cost, even information, which increases customers’ knowledge of what you offer, location, and price. Advertising identifies sellers to customers and reminds infrequent customers about changes in the state of the market. Companies change what they offer and at what price, along with the changes in customer consumption patterns. Therefore, marketing is an investment, not an expense – this especially rings true for a down economy.

Some say companies that consistently advertise reap significant market benefits more often than competing companies, even during a down economy. Marketing – as far as advertising is concerned – offers firms a market advantage when it comes to customer search costs and brand awareness in the long run. Decreasing marketing and advertising during a down economy comes at a cost to the company and the customer. Cutting advertising diminishes the amount of information in circulation, thereby cutting brand awareness, customer conversions, and unit sales. Essentially, in a COVID economic landscape, firms that do not produce information, i.e., do not advertise and promote their products and services, increase customers’ search costs. In a post-COVID landscape, those firms that decided to decrease marketing and advertising will have created an uphill battle for themselves, making it extremely difficult to break through the noise! If you want to be a market leader, understand that it costs to be the boss!

Marketing is information dissemination, and the firms that do not provide customers with useful information promptly are sure to lose market share, awareness, and customer commitment. Even more costly to the firms that do not advertise during this COVID economy will be the loss of permanence and significance, especially for nascent companies. Newer companies will suffer the errors of not advertising during a down economy in the long run. As opposed to established companies, nascent companies have to break through established brand positions in the market.

Case in point, customers do not know what they need to know unless you tell them – and trust me; they want to know! Without your firm’s marketing, customers will be forced to search and purchase elsewhere. In other words, customers have high time preferences – they want satisfaction now – and added high search costs now will result in a more uncertain future for a company.

Now is the time to be even more vigilant about informing and educating your customers based on specific quality measures, prices, and your offering’s importance to them. Remember, market success is about the delivery of a timely, essential product or service information. Information delivery can be accomplished by incrementally informing customers via content pages, digital campaigns, podcasts, digital marketing, and digital promotions to reap the benefits of digital flexibility that increasingly lower customers’ search costs.

We must also not forget that advertising is a social function. A function that should not be ignored but fulfilled. At the same time, advertising is the primary device in which companies of all types bring forth market opportunities to customers. That is, the information costs incurred by the customer are the driver from not knowing to know. Why would customers cease to accept information from their market providers during a down economy? Do customers cease buying things of importance during a down economy? Brands that are choosing to go dark on marketing must think about the subjective nature of customer value and expectations. Failure to meet expectations in the future will result in long periods of resuscitation going into a post-COVID economy.

There are many new methods on the horizon for you to deliver timely advertising. However, it is best to use the technique most satisfactory to your customer, not to all customers, i.e., customers are different in the information needed. Tailored information delivered to your customer during this slowdown is a moment in time where much ground can be gain in lowering knowledge acquisition costs and increasing rapid-fire production of information. Continuous advertising, during this down economy, enables customer conversions and, at any rate, reduces the information cost for customers who find themselves searching for updates of the state of the changing market.

Knowledge comes at a cost. Therefore, the mistake of not advertising will indeed allow a competitor to reap the benefits of your inaction. Unfortunately, customer information and decision-making often are based on past market conditions. Trust me; your customers will love you for keeping them in mind and lowering their search costs, and showing your commitment to them when times are not so great.

 

Value-In-Experience Is The New Way That Firms See Potential For Value For Their Customers.

/0 Comments/in /by

Firms who follow the Austrian Business Model framework are focused on value for their customers – a special kind of value. It’s worth reviewing the history of value theory, and how far it has advanced to the present day.

Goods-dominant thinking about value: value-in-use.

In the past, there was a belief that value was inherent in goods. Tide detergent from Procter and Gamble, for example, boasted special ingredients on which the manufacturer based their promise to make white clothes whiter and colored clothes brighter. The value was claimed to lie in the superior performance of the product formulation. The consumer was the happy recipient of this value that the manufacturer had embedded in the product. This was the prototypical value-in-use scenario, wherein value was created by producers.

Service-dominant thinking about value: value-in-service.

At a later stage in the evolution of value theory, it was realized that the economy was shifting from goods-dominance to service dominance, so the logic of value embedded in products was no longer relevant. Consumers and business customers were not, it was further realized, passive recipients of value. Services are a two-way interaction in which the customer is as active as the service provider. Value, it was identified, is co-created by the service provider and the customer. Think of IT services provided by a vendor to a customer. The customer makes the service value possible by identifying or prioritizing the problem to be solved or the performance to be upgraded; by providing access to the building and/or computer systems; and by providing people to assist and direct the IT service provider. Co-creation of value becomes the norm in service exchange.

Further, it was realized that Tide is actually the provision of a service to the consumer of helping with laundry tasks. The consumer buys the product for the service it provides, The consumer also provides the washing machine, the timing and occasion of the washing task and the kinds of clothes being washed, feedback about performance, and additional aspects of co-creation of value. Therefore co-creation of value became the standard value theory for both products and services.

Value-dominant thinking: value-in-experience.

Businesses have now advanced further in their value theory and value provision. It is now realized that there is no value unless it is identified by the end-user, either the consumer or the business customer. Value is formed only in their domain. In this context, value has a new definition. It is value as an experience. Value is a feeling in the customer’s mind. Customers first appraise a value proposition made by the service provider or goods manufacture – a promise made to them that they evaluate: is there anything in this proposition for me? If so, the customer compares the proposed value to all the alternative substitutes available on the market, as well as comparing the proposed value to not buying at all, saving money for a future purchase opportunity. If they detect relative value, they will make a decision on a value exchange – actually parting with dollars to acquire the service or good that’s on offer.

The most important part of the value process follows: the customer uses the product or service and evaluates the experience of doing so. How does it feel? What emotions are they experiencing? A feeling of satisfaction? A feeling of ease and convenience? A feeling that the experience is better than anticipated? Or worse? Does the task performance feel as enhanced as the service provider promised?

The customer steps back after this cycle of anticipating value / appraising relative value / value exchange / value experience in order to make a final decision: was the overall experience valuable? If they feel that it was, they will enter the cycle again to repeat the experience so long as the same feeling continues to be available to them.

Implications.

There are significant implications for firms and brands who internalize this new understanding of value-as-experience.

  • They realize that they cannot create value. Value-creation is standard business school terminology, but it is not an accurate description of the value process. Firms can only facilitate value as a contribution to the customer’s value creation. Facilitation means designing a value proposition based on an understanding of customer needs and preferences. It means making a value promise to those customers to make them aware of the potential for new value. It means monitoring customers in their evaluation, exchange and experience. It means understanding their final value appraisal, and the experiential emotions behind it. Facilitation is complex and requires constant attention, but the final decision is the customer’s.

 

  •  The skillset that is required for successful value-facilitation is built on customer empathy. Empathy is a boundary-crossing capability – it’s as applicable to the production department and the IT department as it is to the marketing and sales departments. Understanding the mind and emotions of the customer is job 1 for everyone in the contemporary firm.

 

  • The standard mode of action for the value-facilitating firm is responsiveness. They continuously monitor changes in customer preferences and their changing assessment of their options and priorities. They know that customers are continuously adjusting, rebalancing, re-evaluating and re-assessing their choices and decisions based on their life experiences. They are comfortable with this mode of continuous change. They are flexible and agile, avoiding rigidity and hierarchy. They don’t let bureaucracy or any other organizational design attributes get in the way of responding to the customer.

 

  • The ethic of value-facilitating firms is service. They understand that the customer’s preferred experience includes a feeling of trust in their chosen service providers and brands.

Value facilitation is the new required core competency for firms and entrepreneurs. It’s hard to learn through case studies because the process is so dynamic and responsive to changing market environments. It requires every one of your employees, all your software and all your data collection capabilities to be focused on empathic understanding of customer behavior and the deduction process to determine the changing emotions and preferences behind that behavior. We try to explore value facilitation and value-in-experience in depth in the Economics For Entrepreneurs podcast.

 

Your Value Proposition Language Is Your Customer Commitment And Your Company Culture.

/0 Comments/in /by

Peter Drucker is famous for, among many other pieces of business wisdom, his statement that “there is only one valid definition of business purpose: to create a customer”.

That’s a statement with a lot of punch and a lot of clarity. It dismisses all the contemporary alternatives in the debate about the purpose of business firms, such as maximizing shareholder value or sustainability and environmental protection or stakeholder theory.

How do firms create customers? Peter Drucker was equally clear on this question:

“Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

It’s certainly sound advice to place marketing and innovation at the front and center of business operations. Since 1954, when Drucker’s book, The Practice Of Management,  was published, there have been great advances in defining how marketing is conducted and how innovation can be successfully introduced to the market.

The most recent advances have come from the field of economics, a discipline that is dissolving the walls that previously existed between it and psychology and cognitive science, and discovering a new understanding of how and why customers make their economic decisions to buy or abstain from buying, to increase or decrease their usage levels, and to maintain or abandon loyalty to a service provider or a brand.

The new discoveries concentrate in the phenomenon of value. Business language has embraced value in the past, and shifted its focus from value creation (the idea that value is produced within the firm) to value co-creation (the idea that value is produced jointly in an act of exchange between a service provider and a customer). Now, economics – and specifically that brand of economics known as Austrian economics – has identified that all value is created by the customer. It is the customers’ investment of time and effort and emotional commitment and intent to better their circumstances that creates value. Value emerges in the customer domain.

Behind this discovery is a new definitional understanding of value. It is a feeling in the customer’s mind, an experience that’s unique to each customer. Only the customer can have the experience. New research is revealing more about the experience – for example, that it is a learning experience. It takes place over time, beginning with an anticipation or estimate of future value (“what’s in it for me?”), an appraisal of relative value (“is it worth it?”), an exchange experience (the act of buying), a usage experience (the act of using the good or service) and finally an assessment of whether the experience met the expectations of the initial anticipation. The customer is busy and highly engaged in the physical, cognitive and emotional processes of value.

Where does all this leave the firm, and their marketing and innovation activities? The new discovery is that the successful firm is a facilitator – rather than a deliverer or creator – of value. There are degrees of facilitation ranging from passive (e.g. making a purchase opportunity available on an e-commerce site) to active (e.g., providing help-desk or personal service in real time when the customer is experiencing product usage), and many in between.

The pivot in the shift from value creation to value facilitation is the new role of the value proposition. Firms can create new information of which the customer is unaware, such as the development of a new service or the addition of new features to an existing service. Customers want to appraise the potential value represented by new information. They will make the decision, and they give some weight to information from the service provider.

The first element of information in a sound value proposition is empathy. The value process begins with the customer’s pursuit of betterment. They give a signal to entrepreneurial innovators that betterment is possible: the signal is dissatisfaction. Customers can create value but they can’t design their own products and services. Their genius is to always want something better. The responsive entrepreneur diagnoses their inarticulate dissatisfaction using a highly tuned sense of empathy. The value proposition communicates to the customer that the entrepreneur expended significant effort at empathic diagnosis.

The next element of the value proposition is a promise. While unable to create value, firms and brands can promise that they have worked hard to find a way for their customers to  experience value. The value proposition must demonstrate to customers that

  • You recognize them as individuals. Show evidence.
  • You understand their current dissatisfaction – reveal your empathic diagnosis.
  • You offer a credible promise of relief.
  • You reinforce your offer with reasons-to-believe. Before the customer engages emotionally, they want to engage rationally.
  • You have a clear statement of benefits that you can demonstrate are greater than the customer’s cost. The customer’s cost includes not just willingness to pay, but also opportunity costs such as inertia, alternatives and value uncertainty. Help them with their economic calculation.

The value proposition sets the customer’s value learning process in motion: anticipating, weighing, exchanging, experiencing, assessing. The value proposition is your commitment to the customer that the process will be worthwhile, satisfying, enjoyable, and, ideally, beyond their expectations.

And this valuable exercise in making a promise does much more. Through its language, it becomes the culture of your company. Starting from Peter Drucker’s definition of business purpose, every employee, supplier, agent and partner should know their role in creating and retaining a customer.

In the language you use to recognize your customer and their dreams and hopes, their individual context and their preferences and desires, you’ll communicate to your organization how to love the customer and develop relationships. In the language you use to describe the customer’s current dissatisfaction, you’ll nurture an empathic organization. In the language you use to make a promise, you will embed commitment to keep it. In the language of credible and rational support for the promise, you’ll cement internal belief in the promise-keeping mission. And in the language of benefits to the customer, you’ll set the standards of customer-facing behavior and customer relationship management for everyone in your firm.

Yes, a value proposition is just language. In business strategy, language is all we have to tell each other how we will collaborate around a purpose, to share the tools and tactics we’ll all use, and to communicate the successes and learning opportunities that come from implementation and promise-keeping. And, most importantly, to invite the customer to allow us into their value learning process.

Value Proposition Deisgn and Template 5-minute audio for hh.com

The Importance Of Behavioral Data: It Is Not What Customers Say, It Is What They Do.

/0 Comments/in /by

It is preposterous to assume what customers say is more important than where they place their feet and the price they pay for products or services. The customer’s mind is still elusive and challenging for entrepreneurs. If understanding the mind of the customer were easy, everyone would do it!

The insights of the Austrian School of economics tell us that people act purposefully toward future betterment. That is, customers and entrepreneurs both act to attain better future situations than their current situations compared to if they had not acted at all. Customers operate on a value scale, an important insight developed by Carl Menger, elucidating that value is in customers’ minds. In this regard, Menger urged entrepreneurs to “reduce the complex phenomena of human economic activity to the simplest elements”.[1] I echo the sentiments of Carl Menger, but some do not. For example, a recent article titled, 2 Simple Steps For Testing If Your First Customers Like Your Product recommends surveys and the search for “moments of truth” and “tipping points”. The only simple way of ascertaining customers’ product sentiment is through the market itself.

The market process provides excellent insights into customers’ unspoken motives and whether they like your products and services. The best way to figure out if your customer likes your products is to turn to market phenomena. That is, the market price, as reflected by customers’ subjective valuation and competitors’ offerings. Different opinions about the value of a product or service are drawn out through this process. The real test, the market signals, shows how much and to what extent customers are willing to sacrifice to attain your product or service offering.

The customer wants the product with high use value, intended for whatever purposes to help them reach their end. The value of any product is in the customer’s eye, the same way that beauty is in the beholder’s eye! We never truly know to what extent a customer chooses your product over a competitor’s. That is to say, the only reliable data on customer sentiments are that customers have purchased your products – the more, the merrier. Ludwig von Mises in Human Action expressed that, “It is ultimately always the subjective value judgments of individuals that determine the formation of prices.”[2]  Market prices and exchanges alert the entrepreneur whether the product is more or less valuable to the customer than the forgone opportunity to withhold their cash holdings. Money measures prices, and prices measure value. Buying and selling or market abstention determine prices. As such, prices are what customers are willing to pay for a product based on their subjective valuation, keeping in mind their future benefit from that product.

In his salient book, Economics for Real People, Gene Callahan agreed that “only real market prices convey information on the freely chosen values of acting man.”[3]

Therefore, it is sensible to observe market price signals as a means of analyzing customer sentiments. Customer dissatisfaction and loyalty occur when product or service incongruities exist. Market incongruities also exist between the entrepreneurs’ perceptions of changing market realities. The entrepreneur’s function is to address any market incongruities in which the customer, because of market changes, is better off than they were before. The market is in constant movement, which means customer preferences are in perpetual motion.

Retention of customers is a less complicated phenomenon that an entrepreneur might observe. Only individuals act in concert with one another in a spontaneous way to reach their goals in any given market. As the author of the cited article proposes, the concept of customer retention is somewhat misguided because retention relates to competitors’ actions and their substitutable products. The question should be, how many substitutable products exist in my ecosystem? Are other entrepreneurs doing the same that I am not doing?

First, the customer is the holder of the perception of value. Secondly, the customer making future choices is the cornerstone of the basic axiom of action. While taste preferences change over time, so do the market actions of your customers and your competitors. The first axiom of praxeology is that people act; they act to pursue a better situation based on the choices they are presented with. Mises reminds us of this in his work titled, Human Action. What the customer says and the action customers take are two different things, because it is the customers’ action that provides market signals to the entrepreneur. As long as you satisfy the customer’s needs and wants, profits will ensue, and losses decrease.

You strive to get rewarded for the risks involved with bringing new products to the market. Your competitors are seeking the same market reward.

Some do not understand how competition works as a signal of incongruities, leading to profits or losses. Indeed, competition exists so long as customers have market choices and can exercise them. The reality is that customers vote with their dollars and feet. They may voice their liking of your products, but at the same time, are enthralled with a competitors’ quality, service, and price of their product. Competition, therefore, acts as the entrepreneurs’ light post, guiding them toward market opportunities that may go unrealized or deterring them from those that are unfit.

Competition, in the Austrian view, is aimed at who can serve the customer best. Providing the best quality and product to the customer is the leading role of entrepreneurial competition. Competition is not and should not be insidious – rather, it should be productive and dynamic. If entrepreneur A wants to enter a market with capital to prove he or she can do things better than entrepreneur B, that should be his or her choice. Entrepreneur B will come to realize they missed many market opportunities only because that knowledge appears as a result of the competitiveness of entrepreneur A. For example, customers may choose the products of entrepreneur A one day and B the next.

It is not what customers say, but what they do. Entrepreneurial insight about the market and the changes that will occur should be the guiding light for entrepreneurs. Entrepreneurs have to ascertain how people will respond to changes. Customer purchases, retention, a likeness of products or services, and loyalty are results of entrepreneurial market observation, and not causes.

[1] Carl Menger Principles of Economics

[2] Ludwig von Mises: Human Action

[3] Gene Callahan:  Economics for Real People

 

Why All CEO’s Can Benefit From A Familiarity With The Austrian Business Model.

/0 Comments/in /by

For our Economics For Business initiative, we have adopted the motto: Think Better, Think Austrian.

Everyone in business can benefit from studying and understanding the fundamentals of economics. By this, we do not mean the economics of GDP and employment levels and the money supply, and not the economics of the Federal Reserve and the Treasury Department. We mean the economics of human action – how and why individuals behave the way they do in markets, in buying and selling, and in everyday life. Businesses are successful when they fit into and contribute to the everyday lives of customers, and economics provides understanding of how to do so.

The brand of economics that helps you to think better is called Austrian economics, because it originated at the University of Vienna. You may have heard of the Chicago School of Economics, made famous by Milton Friedman and others. Many so called “schools of thought” are named for their geographical origins.

Austrian economics is a tool for business because its thinkers have developed a particularly rigorous body of economic theory, and its practitioners have translated the theory into a complete toolset for application in business. Mainstream economics is not particularly useful for business, for many reasons. Insofar as it deals in fictitious aggregates such as GDP or “the automobile industry”, it can’t help firms who are making decisions about real resources to serve their customers and enable their employees. Insofar as it mathematicizes economic processes for analytical ease, it can’t help firms who deal in trust, loyalty, service, and human values, rather than equations. Mainstream economics can’t be used to strengthen your business model.

Austrian economics, on the other hand, can provide exactly that level of practical utility. In fact, Austrian economists have developed an Austrian Business Model to demonstrate the applicability of this brand of economics in business. The ABM is a framework from which any company can develop or refine its own unique business model suitable for our fast-accelerating digital age. If you are a CEO contemplating the sustainability of your firm’s business model, the ABM will provide you with some new ways of thinking.

A new way to think about value.

Value is one of those terms that is used loosely in business, which leads to flawed understanding. Business schools and business writers refer to “value creation”. Often, they mean market value, the dollar difference between the stock market value of the number of shares outstanding at one point in time and some earlier point in time. Sometimes they equate revenue or profit generated with value. In these cases, value is objective and can be calculated and allocated a dollar denomination.

Austrian economics defines value as subjective. It is a feeling in the customer’s mind, a complex outcome of cognitive, emotional and biological processes, both conscious and unconscious. Value emerges for customers as they live their life and try to assemble an ecosystem of services to help them make it better. This value is context-dependent, idiosyncratic and changeable. This value is created entirely in the customer’s own domain. Firms can’t create value.

This is a very different premise than we are traditionally taught at business school or even in the everyday language of business discussion. For example, a popular book on business models makes this statement: there is something about some firms that makes them more profitable than their rivals. In the framework of the ABM, we would say: there is something about some customers’ desired experiences that makes facilitating them more profitable than other customers’ desired experiences.

This value perspective can stimulate some new behaviors in firms.

  • Obsessive and total focus on the customer — identifying them, understanding them, letting them lead the process of value creation.
  • Selection of a precisely defined group or cohort of customers as your audience, with continuous development of ever deeper and more detailed understanding of their subjective preferences.
  • Development of a value proposition — a hypothesis about how you will help the customer to an experience that they will value. It’s simply that — a hypothesis that you will test as much as possible for verification, but which is never proven until the cycle of market exchange, experience and evaluation is completed.

This business model starts with developing deep understanding.

A new business relationship with value.

Value is what customers seek. Their life is a search for value and an assessment of whether value was realized in their everyday experiences. If your business can not create value, what can it do? The answer is : facilitate value – make it more possible for customers to enjoy their experience.

A design approach can be used – experience design. Experience design consists of imagining every element of the customer’s experience, based on their value learning cycle. What is it about your value proposition that will make them anticipate a valuable experience? What will make them feel that this experience is preferable to any alternative they have, direct or indirect? What will cause them to exchange value — give their dollars for your offering — and what is the price they will be willing to pay? What ensures that they will assess the experience positively after the event?

The key to design is (1) to imagine every possible element of the subjective experience, empathically embracing the customer’s individual context; (2) to understand that every little detail counts and that small differences in delivery can make a huge difference to the perceived experience. In fact, since customer service is so highly developed in modern economies, it is the small details that generate differentiation and uniqueness for your brand.

Since the business is never in control of value, it is important to make measurement part of experience design. Once in the marketplace, your value proposition goes “wild”. You no longer control it. The customer is creating the value and you are not. The best you can do is to be available if they want to invite you into their process, and to be observant of their behavior. Measurement is observation. Don’t presuppose, but do collect data, preferably qualitative data at the individual customer level. This is your raw input for continuous improvement.

Phase 2 is a customer-led design and assembly phase for the entrepreneur.

An experimental approach to value exchange.

Austrian economics sheds bright light on exchange – the transaction between seller and buyer. Exchange is governed by uncertainty – a business can’t know or predict with accuracy what the customer is going to do in the future, or how they will view the terms of exchange. Will the customer perceive sufficient value to even enter into exchange? It’s the ultimate market test. The customer is weighing the benefits they subjectively perceive against the costs, which include money but also any other difficulties or barriers they perceive to making the exchange. Is participating in your offering totally convenient (which is the general standard today) or is there anything in the experience that makes it less convenient and less compelling?

The best way to solve this challenge is to experiment with as many offer bundles as you can in order to observe market results. Does your service sell better online or direct-to-customer? Do customers prefer to subscribe or to buy by the unit? If they try, do they convert? Test as many bundles as you can.

Once you have established the right bundle and willingness to pay, calculate your cash flow and choose your costs in order to generate the margins and profits you require. This is the opposite of the margin math taught in business school, where firms calculate their costs and then add a margin. Austrians discover the price the customer is willing to pay, and then choose the costs compatible with that willingness to pay. The customer determines the price of the exchange, not the business.

Phase 3 is an experimenting and testing phase for the entrepreneur.

Value Agility

You’ve achieved some marketplace results. You’ve established that the customer perceives value in your offering and they’re willing to pay a price that generates positive cash flow and profit.

That same marketplace is incessantly changing. Your approach to the 4th stage of the Austrian business model is dynamic. You make sure that you have all the feedback loops required to receive marketplace data about the acceptance of your offering, and any changes in customer preferences and competitive behaviors. You manage 360 degree monitoring of the customer experience and you anticipate and expect that your experience design, however excellent, will erode over time. The customer will demand something even better, and competitors will aim to match or improve on your delivery. It’s important to keep your model of customer value preferences fresh, and to be planning and preparing new and improved value facilitations. You find ways to maintain flexibility in your capital structure to facilitate the required agility.

Agile businesses continually test and evaluate innovations, and introduce them to the marketplace. Value improvement and value innovation are your goals. The process never stops. The journey never comes to an end.

Your business model must yield sufficient cash flow for substantial amounts of new capital investment each year. Your organizational design must facilitate the addition of new capabilities and the discontinuation or de-emphasis of existing capabilities that no longer are perceived as unique or compelling by the changing customer. Agile businesses monitor their dynamic capability — how much is being added, how much is being changed or updated. Are you keeping up with the customer, the ecosystem in which you engage, and your competitors?

Phase 4 is a phase of continuous dynamic change for the entrepreneur.

You can learn more about the Austrian Business Model here.