45. 2019 In Review: Four Principles Of Austrian Economics You Can Usefully Apply To Your Business
In an attenuated Christmas Eve podcast, we highlighted four of the useful principles we covered during 2019.
Principle 1: Customer Sovereignty – Which Means Putting Your Customer First.
The economists call it customer sovereignty – the principle that it is the consumer who ultimately decides which businesses are successful and which are not, as a result of their purchasing (or not purchasing) entrepreneurial offerings. Stephen Denning calls it The Law Of The Customer. John Rossman calls it Customer Obsession.
Entrepreneurs who understand the leverage of customer sovereignty do everything they can to know and understand their customer’s goals, values and feelings. They seek out negative emotions – disappointments, unease, a feeling that things could be better – because these are the inputs for designing new offerings that customers will welcome to make their lives better and relieve their unease.
The method of Austrian Economics in this regard is empathy. It’s a soft skill you can nurture and develop with practice. Use the empathic diagnosis tool that we provided earlier this year (link below).
The techniques for empathy include the Means-End Ladder (understanding customers’ goals, or ends, and why they select the means they choose to attain them) and Listening From The Heart, a market research technique given to us by Isabel Aneyba.
Check out these episodes and PDF resources for a deeper understanding of Customer Sovereignty:
- Peter Klein on Means and Ends (Click for Episode Page)
- The Means-Ends Ladder Tool (Click for PDF Resource)
- How to use the Means-Ends Ladder Tool (Click for PDF Resource)
- Peter Klein on Entrepreneurial Empathy (Click for Episode Page)
- Empathy Tools for Entrepreneurs (Click for PDF Resource)
- Isabel Aneyba: Listening From The Heart And The Techniques Of Empathy (Click for Episode Page)
Principle 2: Avoid Competition.
The mainstream economics concept of competition considers firms competing to sell identical goods to an identical audience. Entrepreneurs take the opposite tack: they choose a select group of customers whom they understand deeply, and they assemble a unique set of capabilities to deliver unique, customized solutions.
The tools we presented during the year include differentiation and branding. Differentiation is the pursuit of uniqueness in your offering. It requires providing your customer with a means to achieve their goals that is different and better than any alternative. That can be faster, or easier to use, or more comfortable, or more personalized, or some other attribute or combination of attributes that the customer prefers. Differentiation is not achieved through pricing. It’s achieved by superior understanding of your customer and their subjective goals.
Trini Amador demonstrated how to capture differentiation in a brand. A brand is a promise – a unique promise only you can keep to help customers achieve their ends. It’s a promise that customers can embrace emotionally, and that you can deliver consistently, every time with certainty and without exception. Promises must be kept. Trini provided us with a templated process for brand building.
Check out these episodes and PDF resources for a deeper understanding of competition:
- Per Bylund: What Is Competition? (Click for Episode Page)
- Trini Amador on Brand Building (Click for Episode Page)
- Brand Uniqueness Blueprint: (Click for PDF Download)
Principle 3: Dynamic Flexibility.
Austrian economics has always been on the leading edge of dynamically flexible resource allocation and capital assembly. Austrians see the worth of capital purely in the future revenue streams that it can generate from customers. If customers change, and the revenue stream changes, the worth of the capital has changed. The capital structure of a firm must change to reflect changes in the marketplace.
This applies to hardware, software, human capital, processes and methods and organization. Old capital must not be allowed to eat up resources that could be better used to serve customers in new ways.
With the arrival of the digital age, dematerialization, interconnectedness that can support rapid assembly and disassembly of global networks and supply chains, practitioners are now able to apply in practice what Austrian theory has been saying all along.
Dynamic flexibility is well-captured in the methods of the Agile revolution, as Steve Denning explained. And the ultimate expression of dynamic flexibility is innovation – the dynamic flexibility to supplant old technologies, old services, old organizational structures with new ones. Curt Carlson gave us his formula for successful innovation, and it’s very Austrian: always start with the customer’s need.
Check out these episodes and PDF resources for a deeper understanding of Dynamic Flexibility:
- Stephen Denning on Agile Resource Allocation (Click for Episode Page)
- Per Bylund on The Laws Of Agile (Click for Episode Page)
- Curt Carlson on Systematic Innovation (Click for Episode Page)
- Curt Carlson’s N-A-B-C Innovation System (Click for PDF Resource)
Principle 4: The Economics Of Value.
We finished the year with three episodes on the new economics of value. It’s the opposite of traditional economic thinking for entrepreneurs – the economics of scale and cost reduction. The economics of value entail selection of the smallest customer group to serve in the best possible way, so that they can experience maximum subjective value. It involves scaling down – personalization, customization, scarcity, limited availability, and high differentiation. We published a simple guide to the economics of value.
Mark Packard shared his latest research on the economics of value and specifically how customers experience it. They do so as a learning process, one that takes place entirely beyond the entrepreneur’s line of visibility – in the customer’s perception. Mark explained the neuroscience as well as the economics behind the process, and introduced a 5-part cycle of customer value learning. We published a flow chart and a set of explanatory slides, using pizza as an example.
The power of the value learning cycle is that it replaces the concept of the funnel for entrepreneurs. The funnel has built-in inefficiency – wide at the top and full of costs, with revenue at the end where it’s narrow. There’s a lot of waste. The value learning cycle, when used effectively, engages a small group of customers well-known to the entrepreneur, and guides them logically to an experienced benefit that they assess positively.
Check out these episodes and PDF resources for a deeper understanding of how customers experience value:
- Per Bylund on The Economics Of Value (Click for Episode Page)
- Economics Of Value versus Economics Of Scale (Click for PDF Resource)
- Mark Packard on The Value Learning Process (Click for Episode Page)
- Value Learning Process Map (Click for PDF Resource)