A podcast based on the winning principle that entrepreneurs need only know the laws of economics plus the minds of customers. After that, apply your imagination.

67. Trini Amador: The Business Tools to Shift Customer Behavior in Your Favor

Every successful business is built on empathic understanding of customers’ preferences. As we know from the theories of Austrian economics, the preference scales of every individual are highly subjective, idiosyncratic, context-dependent, and highly changeable. How does an entrepreneur develop the appropriate level of understanding? Can this understanding be a source of business-building advantage?

We talked with Trini Amador, a returning guest and an in-demand global branding and marketing consultant who has developed an effective process for every entrepreneur to achieve a breakthrough level of insight into customer motivations.

Key Takeaways & Actionable Insights

Customers bond with businesses and brands they love and trust. The choices they make have their own internal logic. Entrepreneurs must develop insights into their motivations.

Insights are the lifeblood of any brand- or business-owner, says Trini. Why do customers behave the way they do — especially in buying or not buying? Insights tell you. They become the difference between “just a business” and a brand that successfully delivers against the needs of their customers.

Insights are the entrepreneur’s understanding of customers’ motivations, values and attitudes.

They’re the “Why” in why people act the way they do. Always emotional, always subjective. Entrepreneurs who understand “Why” can design stimulus or communication or innovation to motivate buying behavior.

There’s an insights generation process. It starts with identifying the people you wish to serve.

Trini recommends a focus on your “core target” audience — not a general definition of who might buy, rather a highly specific profiling of your most likely and best prospects. Mark Packard, in episode #62, called them “high knowledge” customers. They know what they want, they know the category and they’re precise about what experience is satisfactory and what is not.

There is no shortage of data for you to utilize. Make sure you select the most important and useful data:

Attitudinal data: how your customer feels, especially if they are expressing dissatisfaction;

Behavioral data: behavior reveals preferences — “motivations are embedded in behaviors”.

The best sources of data are first hand observation and one-on-one conversation.

Organize your data in an insightful way.

To avoid data overload (there’s so much of it to collect!) Trini suggested  couple of organizational techniques.

One is visualization: build a visual profile of the customer with photos and notes indicating their hobbies, favorite brands, activities — visuals that depict their behavior and preferences.

A second is personalization: write a composite profile as if it were one individual and use it as a “one perfect customer” persona.

The objective is to change behaviors. Insight is the required key to unlock the possibility of doing so.

Trini cited the example of his own wine brand from Sonoma County, California: Gracianna. For example, the objective may be to get people to visit the tasting room who have never visited before. That’s a behavior change.

Why do people behave the way they do? One inquiry tool is the 5 Why’s, which is a way to examine the sequential rungs on the individual’s means-ends ladder to identify their highest value, the motivation that is ultimately driving them. Trini used the example of why some people feel better about buying a Tesla than an alternative vehicle. Ultimately, they want to feel that they are better citizens of the planet. Trini entertainingly ascends the rungs of the ladder from “need a new car” and “get from A to B” to arrive at “the feeling of being a better citizen”.

Using these tools, we arrive at a deep understanding of why customers make the choices they make — that is, an insight.

The Insight feeds the Behavior Modification tool.

The definitive “Why?” that emerges from the 5 Why’s inquiry becomes the current state in the behavior modification tool. This tool has two components:

Attitude Modification: behaviors are related to attitudes, and so to change an attitude can lead to a change in behavior. Attitude modification documents the FROM (the attitude we want to change) and the TO (the new attitude we want to encourage).

Key Marketing Platform: a marketing platform is a staging point for all initiatives aimed at achieving the desired attitude among target customers: communication, promotion, innovation, distribution, relationship.

Continuing the Tesla example, we want our prospective customer to feel that Tesla is the most progressive electric car that helps save the planet in the coolest, most prestigious ultra-premium way. If we can get them to feel that way, they’ll buy. The entrepreneur imagines the future behavior, and then acts through the marketing platform to cultivate that motivation.

How? Consider all resources that fall under the headings of communication, innovation, promotion, expanded distribution, and enhanced relationships. Experiment, experiment, experiment. Test, test, test. We’ll discuss the techniques in a future episode of Economics For Entrepreneurs.

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66. John Tamny On America’s Uniquely Productive Entrepreneurial Flywheel

The flywheel is a robust and powerful mechanism so long as restrictive regulation by government and failures of imagination by capitalists do not slow it down.

John Tamny speaks articulately with Hunter Hastings about the uniquely American entrepreneurial flywheel in Economics For Entrepreneurs podcast #66.

Key Takeaways and Actionable Insights

A growth business is what John Rossman, in episode #50, termed a flywheel. Using amazon.com as an example, he gave us this simple image.

Flywheel Economy Diagram

The flywheel looks simple, but in reality it’s quite nuanced. Lower prices and a great customer experience will bring customers in, Bezos reasoned. High traffic will lead to higher sales numbers, which will draw in more third-party, commission-paying sellers. Each additional seller will allow Amazon to get more out of fixed costs like fulfillment centers and the servers needed to run the website. This greater efficiency will then enable it to lower prices further. More sellers will also lead to better selection. All of these effects will come full circle back to a better customer experience.

John Tamny sees the American entrepreneurial economy as a beautiful and productive flywheel.

Why are Americans so entrepreneurially focused? We descend from “the crazies” – the other thinkers who came from around the world, dissatisfied with their lives, and willing to cross oceans and borders to get to a place that offers no security but offers freedom. They took the ultimate entrepreneurial leap. We got the nut cases. Steve Jobs, for example, was of Syrian descent. Could he have started Apple in Syria? No.

John Tamny's Entrepreneurial Flywheel

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Entrepreneurs lead us to a better place.

John’s definition of an entrepreneur is someone who has a vision that everyone else thinks is ridiculous, yet they follow it anyway. They have no time for the way things are done today. They want something different. And to win consumer acceptance, what’s different must also be better. So they quite literally lead us to a better place. Horse-drawn carriages weren’t enough, so Henry Ford gave people something different. Everyone wanted Blackberry phones when Steve Jobs brought out the iPhone, and he quickly demonstrated its superiority. Every entrepreneurial act is speculation – there is never certainty that people are going to want the new product. That’s what is so important about entrepreneurs.

Entrepreneurs need to attract intrepid finance and intrepid financiers.

Silicon Valley is littered with VC’s who turned down Facebook, and turned down Amazon. Founding entrepreneurs think differently and have a vision that is far out of the norm, and they need to be matched with financiers who can be strong supporters and collaborators on the path to a better place. Irrespective of whether it is from Wall Street or Sand Hill Road, or from visionary friends and family, it’s critically important that we figure out a way to get financing to brilliant people. Government restrictions on entrepreneurial activity are certainly barriers to growth, but so is failure of imagination on the part of capitalists.

Intrepid lending takes place far away from banks. Unspent wealth is the source, and the more unspent wealth one person has, the more risks they can take.

We tend to complain about the antiquated and sclerotic banking system, but it has nothing to do with entrepreneurs and innovation. Banks make loans to entities they know will pay them back. Entrepreneurs fail 90% of the time. Banks want nothing to do with innovation.

Those with unspent wealth are the most crucial people in the economy when they match their unspent wealth with entrepreneurial talent and vision. The more unspent wealth they have – and the less the government takes away from them in taxes – the more intrepid they can be in investing it. When we tax away the wealth if the richest, we tax away the most important wealth of all. – that which has the highest odds of being directed towards new ideas that, while they look promising, have high odds of failure.

More and more of us have the opportunity to become entrepreneurs, if we harness the flywheel of original ideas that attract intrepid capital.

One of John’s many books, The End Of Work, describes how we are all now so enabled with interconnectivity to resources that we have the chance to make money by doing what we love. Our passion can become our job. If we are able to imagine a future place that is better – that improves the lives of individuals – we can create a growing business. The more of us who can do this, the more we grow the whole economy – which, after all, is made up of individuals. If we can also attract that intrepid capital that John refers to, growth becomes faster and higher.

Besides The End Of Work: Why Your Passion Can Become Your Job, John’s books include Popular Economics: What The Rolling Stones, Downton Abbey and LeBron James Can Teach You About Economics, and Who Needs The Fed: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America’s Central Bank.

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65. David Bienstock on the Business of Politics

When we talk about entrepreneurial alertness to opportunity, it can sound pretty vague. What exactly does that mean? How is alertness translated into profitable action?

Key Takeaways and Actionable Insights

This week’s guest, David Bienstock, provided us with a very precise example. He had just started his media buying services business when a phone call came in. Do you provide service in the category of political advertising? David’s answer was yes. There was no reason for it to be otherwise because there was no information at the time that would indicate any differences between media buying services in the political advertising category compared to the commercial advertising category.

He was able to transfer existing knowledge from his expertise in media buying and placement, and also develop more and more new knowledge. He thereby identified more and more ways in which political advertising was specialized — factors of timing, competitiveness, geography, pricing, regulation, and many more. David built his own island of specialization and became the foremost expert in a burgeoning field.

What can we learn from following David’s entrepreneurial journey?

David Bienstock's Entrepreneurial Journey

1) The alertness we talk about that entrepreneurs display to opportunities can be triggered by the smallest piece of data. For David, it was one phone call. His instantaneously positive and open response led to a long and successful journey.

2) Wherever there is business expenditure there is an opportunity for an entrepreneurial business service. The business we discussed in episode #65 is campaigning — political, public affairs, ballot measures. How much is spent on campaigns? A lot. There’s the opportunity.

3) The best entrepreneurial businesses are often the ones that clients put you into. David’s inbound phone call was a new client stating an unmet need. That’s all the invitation the alert entrepreneur requires.

4) Opportunities, once seized, expand. David has expanded his original business by adding many related services for current clients to utilize, including multi-channel media, market research and analytics. In addition, he has added multiple new businesses in related spaces. He’s been creative, he’s taken action, he’s been constantly looking for new opportunities that are complementary to the first one that he spotted. However small the start, the next steps will quickly become apparent to the entrepreneur who is not only alert to opportunity but also to expansion and growth.

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64. Per Bylund: Avoid The Errors of UNtrepreneurship.

Per Bylund warns us that there is some entrepreneurial advice and some proposed business models that are misleading. They amount to what he calls UNtrepreneurship – a bad business direction to take. He defines the standard of the Austrian entrepreneurial business model and highlights the business risks that lurk on some other pathways in Economics For Entrepreneurs podcast #64.

Key Takeaways and Actionable Insights

Follow the guidance of the Austrian Business Model.

The entrepreneurial business model is built on a set of important economic principles. Wandering away from the entrepreneurial pathway can lead to errors that Per Bylund christened UNtrepreneurship.

Focus on serving consumers and customers.

The purpose of a business is to create and keep a customer. It’s a demanding task, because customer needs are continuously evolving and changing, and competing entrepreneurs are vying for their dollars. It is critical to maintain intense focus on service to customers.

There is a lot of distracting entrepreneurial advice. You might encounter instructions to “identify and exploit market gaps” or to “seize opportunities”, for example. But there are no such things as gaps to fill or opportunities to grab. The language makes it sound like these are objective phenomena, unmasked by analytics. They’re not. The right strategic platform for entrepreneurs is to focus on serving customers by identifying their preferences and meeting them.

Every hour you spend, every strategic thought you develop, should be focused on the customer.

Productivity lies in returns on customer satisfaction.

You’ll hear a lot of talk of generating returns, especially on funds invested by lenders or VC’s. These returns are emergent outcomes of other activities. Even profit is an indirect outcome more than it is a goal.

Ludwig von Mises wrote in Human Action that the task of the entrepreneur is to use capital “to the best possible satisfaction of consumers”. Anything else “hurts people’s well-being”. Customer sovereignty, in the language of economics, means that the customer decides, by buying or not buying, what will be the return to the entrepreneur on their investments of time, effort and money. Productivity results from the most efficient assembly and combination of resources to produce customer satisfaction.

Sometimes, business literature and business practice can deviate from this standard. Often, for example, the pursuit of “scaling” – making a firm big, in numbers of employees, say, or number of transactions, as fast as possible – can divert resources from serving customers to serving the needs of infrastructure growth and bureaucracy. Customer satisfaction should be the only focus.

Understand subjective value.

The economic concept of value is challenging to master for entrepreneurs. Value is an experience in the customer’s mind. We’ve also identified that it’s a process – a learning process customers initiate and actively conduct to make a decision as to whether an offering has potential value (“I might like it”), relative value (“I think I might feel better about buying X versus Y”), exchange value (“I am willing to pay Z dollars at this point in time to acquire X”), experience value (“my satisfaction was more / less / the same as I expected”) and assessed value (“looking back on it, my value experience was worthwhile and worth repeating unless something with more potential value is offered to me”). All through this cycle, the customer is active in the marketplace, learning about alternative offers, changing their consumption preferences, interacting with other people with different experiences and preferences that might be influential, receiving advertising messages, and generally rearranging their personal value recipe.

It’s a challenge to understand and a challenge to keep up. An entrepreneur’s understanding of subjective value is a critical business success component. Importantly, the business school concept of “creating value” can be unhelpful. Value is created by the customer. The role of the entrepreneur is to understand how to fit in to the customer’s life and contribute to it, making possible (“facilitating”) the mental experience we call value.

View pricing as a discovery process, not as an expression of market power.

Another challenge of the economic way of thinking to conventional business writing is the understanding of prices. Prices are emergent market signals, ultimately determined by the consumer’s willingness to pay. Prices can’t be “set” by the entrepreneur. There is no “pricing power”. Margins can not be calculated by determining the price you want to sell at and then subtracting the costs you have imposed on yourself.

Entrepreneurs discover prices – the market reveals them. Attempts to use pricing as leverage to grow market share irrespective of costs and profits are doomed to failure if it is later discovered that customers become conditioned to the artificially low prices and resist returning to a higher price.

Follow the entrepreneurial ethic.

Per Bylund has emphasized that there is an entrepreneurial ethic that applies. Entrepreneurship is the service of meeting customer needs. Profit emerges as a result of successfully accomplishing this task. Profit is necessary to maintain the service, but it’s not necessarily the primary goal. In some ways, entrepreneurship is a calling. There are social and emotional benefits for taking on the role of the entrepreneur – we can classify them as psychic profit. There is purpose and meaning in the entrepreneurial life.

This should not be confused with the misguided economics of so-called social entrepreneurship or impact entrepreneurship: attempting to rearrange and redistribute resources in society through the active application of the entrepreneur’s personal preferences. Only the customer’s preferences in the marketplace can direct the best allocation of resources. The entrepreneurial ethic is to follow and serve.

Our Free E4E Knowledge Graphic summarizes these precepts – keep it on your device for reference.

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63. Dusty Wunderlich on FinTech Financing: Entrepreneurs Helping Entrepreneurs

Key Takeaways and Actionable Insights

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

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

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

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

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

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

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

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

FinTech Ecosystem Map

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Key Takeaways and Actionable Insights

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

Value is a process.

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

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

In other words, it’s a cycle.

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

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

Value Ethnography

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

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

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

City Of From / City Of To

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

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

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

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

Empathy and The Customer Knowledge Generation framework.

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

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

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

Next: changing the customer’s mental model.

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

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