Posts

45. 2019 In Review: Four Principles Of Austrian Economics You Can Usefully Apply To Your Business

/0 Comments/in /by

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:

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:

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:

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:

Enjoying The Podcast? Review, Subscribe & Listen On Your Favorite Platform:

Apple Podcasts, Google Play, Stitcher, Spotify

44. Mark Packard on The Value Learning Process

/0 Comments/in /by

Entrepreneurs are redrawing the Customer Journey Map. Based on the latest knowledge from both economics and neuroscience, Dr. Mark Packard explains the five stages of the Value Learning Process on today’s episode.

Key Takeaways and Actionable Insights

To be able to adopt new ideas and successfully apply new techniques, it is sometimes necessary to discard old ones that are barriers to clear thinking. The theory and vocabulary of value illustrate one such barrier.

The language of business schools and many business books is that firms and entrepreneurs create value. That terminology implies that value is somehow embedded in the product or service the firm designs and markets, and that value is formed in the firm’s domain.

The business world has made a little progress in the last few years by opening up to the idea that value is somehow co-created by the provider and the customer. In co-creation, customers’ own usage of the service causes the value to be realized, and their comments, criticisms and suggestions become useful feedback to the provider to further improve the offering.

But we have known since 1871 that value actually lies entirely in the customer’s domain. Carl Menger wrote:

“Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men.”

Now, Mark Packard sheds more light on exactly how value forms and develops “in the consciousness of men” – or, as we would say today, in the customer’s experience.

Mark introduces the concept of value learning. This is the mental process through which the customer advances in response to a value proposition from an entrepreneur or a brand. It’s important for entrepreneurs to understand, monitor and measure the customer’s value learning. There are five stages, illustrated by our Knowledge Map Graphic below.

Predicted Value

Customers evaluate an offering that’s available to them with a mental prediction: I think that this offering might be valuable to me (i.e. make me feel I am improving my circumstances / make me feel better / help me towards my goal). Predictive value is translated into a price one is willing to pay for that experience. This willingness to pay is then compared to the price of the product. It’s a yes or a no.

Entrepreneurial action: Manage predictions strategically. Persuade customers that the predicted value is worth the cost, but don’t overhype your product. Identify those customers whose predicted value relative to your price is positive. These are your only current target (unless or until you redesign your value proposition).

Relative Value

The customer’s next cognitive action is to identify whether the predicted value is high or low relative to alternatives. These alternatives include not just other products in your industry (if any), but all other ways your customer might also satisfy the need that your product addresses. For example, one alternative is to keep their dollars in their wallet, if they think they can satisfy their own need for themselves at a lower cost (all in). The predicted value of your offering must be greater than all alternatives in their perception.

Entrepreneurial action: Calibrate your offering to the customer’s relative value calculation using price, features and benefits.

Exchange Value

If the customer’s Relative Value perception is sufficiently positive, they’ll exchange dollars with you. But remember to account for the customer’s uncertainty. If the relative value is comparable between alternatives, customers will generally prefer the more familiar (certain) value over your uncertain offering.

Entrepreneurial action: Use price discovery techniques to align price and relative value.

Value Experience

The customer uses or consumes the product or service. They’re generating feelings and perceptions as they do so, either positive or negative. Many of these are in response to a mental comparison with Predicted Value – is the experience better or worse than predicted?

Entrepreneurial action: Monitor the customer’s perceived experience. Be aware of variables in circumstances (time, place, mood, competitive environment) that can change their perceptions. You may need to guide the customer’s first consumption experience(s) to ensure proper use and optimal experience.

Value Assessment

The customer, either concurrently or subsequently, makes a mental value assessment based on their experience. Good or bad? Better or worse than predicted? Does my assessment result in predicted value for a repeat purchase or subscription?

Entrepreneurial action: Measure. This is the stage where measurement becomes useful. Find a measurement that works for you. It could be in sales dollars, purchase volume trends, or customer satisfaction metrics. Such metrics are mere approximations, however, and are neither precise nor set in stone. Be careful how you interpret measured results.

This value learning process is mutual. The customer is always evaluating and re-evaluating and the entrepreneur must keep pace in service, relationship management and innovation. It’s a never-ending cycle of value.

In future podcast episodes, Mark will share some of the new tools he has developed to help entrepreneurs master the cycle. Follow Mark on Twitter to keep updated between now and then!

SUBSCRIBE

Apple Podcasts, Google Play, Stitcher, Spotify

DOWNLOADS & EXTRAS

Understanding The Mind of The Customer: Our Free E-Book

Value Is A Learning Process PDF: Download

39 Rick Rule: Deep Understanding of Markets Opens a Pathway to Entrepreneurial Leadership

/0 Comments/in /by

Rick Rule is CEO at Sprott US Holdings. His lifetime focus on natural resources finance enabled him to carve a unique pathway to entrepreneurial success. Like many entrepreneurial journeys, Rick’s had some twists and turns. Here are some of the key stages.

Key Takeaways and Actionable Insights

Find out early what you love. Rick enjoyed the outdoors, nature and therefore natural resources, the associated science of efficient and effective use of natural resources, and finance. All of us have a combination of likes and preferences that may stimulate us but may not initially appear to present us with an entrepreneurial recipe. But as Curt Carlson explained in episode #34, combining knowledge from different people and fields can result in compounding insights.

Rick Rule's Entrepreneurial Leadership

Click the image to download the Full PDF

Combine Knowledge In New Ways. Rick combined natural resource science with principles of corporate finance, specifically debt and equity finance for extractive industries. As a result of the special properties of natural resource markets, and firms’ needs for customized financing, an opportunity niche emerged. Rick’s application of his special combination of knowledge placed him in a competitively advantaged position.

Learn By (Hard) Experience. Rick learned not to confuse a bull market with brains, as he puts it. He did business through a complete commodity market cycle in the 1970’s through the early 80’s, experiencing volatility and ups and downs first hand. Theory is no substitute for experience. Nevertheless, his knowledge of Austrian Business Cycle Theory, Austrian Price Theory (“the cure for high prices is high prices, and the cure for low prices is low prices”) granted him a superior perspective in interpreting market signals.

Develop Deep Market And Customer Understanding. In his focus market, Rick developed a business segmentation that focused on participant firms of a defined size (<$250MM market cap). He studied those customers and understood their circumstances. The consequence of limited information flow (data about these firms did not flow easily between conventional market analysts), was that the firms had limited access to capital. Rick was able to overcome these information gaps, making him a preferred supplier of scarce finance.

Identify A Need You Can Fill For Your Carefully Selected Audience In Your Carefully Selected Market Segment. The business model came together in a way that Rick describes as “lender of last resort to high-quality management teams in high-quality companies that were not popular” and were therefore capital constrained. In addition, Rick’s understanding of business cycles and commodity prices further strengthened his confidence in lending when others would not, the market rewards for which turned out to be high.

Combine Empathy, Trust and Courage. Rick confirmed the E4E emphasis on empathy as an important skill for entrepreneurs – primarily, in his case, empathy for the customers whom he financed. He sought to combine empathy with trust: in a market where information is scarce, it is imperative to have trust in the sources. “Without trust,” says Rick, “I have no information, and therefore I can not make decisions.” The third emotional attribute he identified is courage – the courage to have the conviction that your model indicating a future upcycle or price rise is well constructed, and not to second-guess it during the time that the trade is underwater.

We’ve summarized these journey milestones – and the Austrian foundations underlying them – in this free PDF download. 

DOWNLOADS & EXTRAS

The Rick Rule’s Path to Entrepreneurial Leadership PDF: Our Free E4E Knowledge Graphic

SUBSCRIBE

Apple Podcasts, Google Play, Stitcher, Spotify

31. Per Bylund on Big Data vs. Big Ideas

/0 Comments/in /by

Wouldn’t it be nice to predict the future? It’s tempting to reach for the analytical tools and big data sets that are newly available and for which big claims are made regarding their predictive capabilities. For entrepreneurs, small businesses and corporate innovation teams, rich qualitative data are far more relevant and collecting these data is far more productive. By this we mean talking to customers and potential customers, observing behaviors rather than collecting clickstream data, and immersing yourself in the unpredictable subjectivity of the consumer.

In this week’s Economics For Entrepreneurs podcast, Dr. Per Bylund analyzes what big data can and can’t do for entrepreneurs and the innovation process, and explains how qualitative data can generate big ideas for the future.

Key Takeaways and Actionable Insights

Predictive analytics can’t predict! That was Dr. Per Bylund’s provocative introduction to our discussion of the uses and drawbacks of big data in the context of the entrepreneurial mission.

The claims made on behalf of the analytical powers of big data may be exaggerated, and entrepreneurs should learn what they can and can not expect from the application of big data analytics to business. Otherwise there is the chance of both error and wasted spending on the tools of business intelligence. It’s important to distinguish between the different roles of multiple data types.

Big Data vs Big Ideas Chart

Click on the image to download the Big Data vs. Big Ideas PDF

Pattern recognition is not prediction. Dr Bylund contrasted what Big Data can and can’t do for entrepreneurs. He used an example of analytics predicting the outcomes of future NFL games. Here there are large sets of historical data on players, teams, plays and previous outcomes. There are limited potential outcomes (e.g. one team will win the game – there is no third team that will unexpectedly turn up to change the range of possible outcomes). The predictive analytics got the outcome right about 75% of the time. In a world of more open-ended results (e.g. predicting the outcome of a multi-team tournament), big data could be expected to be right fewer times. There is danger in over-reliance on the law of large numbers and tendencies like reversion to the mean. Pattern recognition from historical data sets (which is what big data does well) is not prediction.

In fact, in the world of economics and entrepreneurship, there is no prediction. Entrepreneurs deal with social phenomena that emerge from individuals’ actions and interactions, across billions and trillions of instances. Entrepreneurial outcomes depend on how people act, and how they act depends on their feelings, how they see the world (subjectivism) and what they feel like doing. We can’t know or predict that. There may be some general rules that apply in many cases (for example, raising prices rapidly and significantly in a competitive market will, all other things being equal, result in a reduced unit volume of sales). But those rules don’t predict the decisions of specific individuals in specific cases.

Mainstream economists and central planners long for a mechanistic world: turn a dial, get a result. But this approach is not valid. In the economy or any market, all variables are dependent on all other variables. Everything affects everything. The consequences of any action – like central bank interest rate tinkering – affect different people in different ways, and whoever is affected first or last will experience different consequences and react in different ways.

The core of the issue is that human behavior is unpredictable. Subjective choices can’t be predicted.

Prediction implies precision, and that’s not available.

Yet the entrepreneur must deal with the future. The entrepreneur seeks to produce a good or a service that consumers will consider valuable at some point in the future. Even if they tell you today that they will value your offering in the future, they may change their minds.

Is there any contribution that big data can make, any help that it can offer? We discussed these areas:

  • It’s hard to know what people might want in the future. But it might be possible to identify what specific people will not want, based on their past behaviors. Data can show you which purchases cluster together, and which don’t. Beef purchasers may also buy red wine. Vegans won’t buy beef. Facebook and other ad targeting tools (which use big data effectively) can help you avoid marketing beef to vegans or pasta to keto diet followers.
  • Data can sometimes detect dissatisfactions, which are the universal raw material for entrepreneurs.  Analysis of sentiments expressed in reviews can guide you in the right direction. Writing a negative review on Yelp or Trip Advisor is both a behavior and an expression of sentiment and data analytics can detect patterns here. But Dr.Bylund advises us that it can only provide a guide – there is no substitute for talking directly to consumers, human to human.
  • Data can help with segmentation. If you want to better understand a geographical market segment or a demographic segment or a behavioral segment, there are lots of data that can detect the differences between segments, and this can help you with targeting of communications (but not necessarily with the message).
  • Quantitative data can be combined with qualitative data to sharpen insights. Dr. Smita Bakshi, in our episode #24 described how analysis of student performance data (50% of computer science students don’t complete their first-year course) combined with personal discussions with students in class, delivered an empathic understanding of their struggles, from which her team developed a winning interactive learning tool for computer programming languages.

Sometimes an entrepreneur can skip the big data analytics, but never the empathic diagnosis. Entrepreneurship consists of understanding the mind of the consumer and understanding the economics of the marketplace. Where the market is heading and what will be in consumers’ minds in the future are more the realm of judgement than analytics.

Entrepreneurs behave differently than dig data-driven large corporates. They think harder about the customer, they study human motivation, they utilize the rich qualitative data that comes from talking to customers, and they concentrate their capital and resources on developing and extrapolating their customer understanding. They uncover subjective value – the value that only exists in the mind of the consumer. Imagination is the key to the future. Entrepreneurs try to succeed in bringing about that imagined future. Big data might help them avoid mistakes, but it’s impossible to rely on the past to produce the future.

DOWNLOAD

PDF icon Download Our Big Data vs. Big Ideas PDF (129 KB)

SUBSCRIBE

Apple Podcasts, Google Play, Stitcher, Spotify

30. Trini Amador on Brand Building

/0 Comments/in /by

In Austrian Capital Theory, Brands are valuable financial assets. Brands are architected in response to the subjective value preferences of consumers, and the more accurate the responsiveness, the higher, faster, longer and more reliable are the future cash flows. Brands are promises of value and, when the promise is kept, the result is delighted, enthusiastic and loyal consumers.

In the current episode of the E4E podcast, global branding expert Trini Amador explains how every business and every entrepreneur can methodically build a strong brand to deliver consumer value and unleash cash flow.

Key Takeaways and Actionable Insights

The entrepreneur makes a promise that the consumer will experience value. The brand is the promise. Here are the principles for building a strong brand.

There are two pillars to the construction: Relevance and Differentiation.

Pillar 1: Relevance. It’s central to economics because economics deals with individuals and their preferences and their choices. Your brand is not for everyone, it’s for specific individuals. It’s important to know them and understand them deeply.

Relevance Box 1: Core Target

Many brand owners think that the more customers they target, the more they will sell. The opposite is true. Define your target audience as narrowly as possible.

Relevance Box 2: Core Needs and Insights

Strong brands are built on unique entrepreneurial insights into the motivations of their core target audience. Entrepreneurs use the deductive method: observing behavior and deducing motivations from those observations, using tools like the Means-End Chain.

Relevance Box 3: Customer’s Frame Of Reference

This component is based on the Austrian value principle that the customer finds value in meeting a need in a way that is better (for them) than direct substitutes, indirect substitutes, or than non-purchase or deferred purchase.

Pillar 2: Differentiation

In Pillar two, we build an implementation of the Austrian principle of uniqueness in your entrepreneurial offering. A brand is the ideal platform for communicating uniqueness.

Differentiation Box 1: Brand Promise

The brand promise is to deliver in a unique way the highest possible level of benefit, which is an emotional benefit, the consumer feeling that your offering assures they will achieve their highest fulfillment.

Differentiation Box 2: Brand Delivery.

Brand delivery is how the brand keeps the promise it makes.

Differentiation Box 3: Brand Character

Customers are people and they relate to brands subjectively – almost as if the brand were a person.

Building the 6-Box Brand Foundation brings clarity about what your brand stands for, defines your competitive advantage, and ensures that your entire team knows what they must deliver, and what the customer expects.

Download the set of free resources here to help you implement your own brand-building process.

DOWNLOAD

PDF icon Download Our Brand Uniqueness Blueprint PDF (129 KB)

SUBSCRIBE

Apple Podcasts, Google Play, Stitcher, Spotify

29. Per Bylund on the Critical Importance of Executional Excellence and How To Achieve It

/0 Comments/in /by

Have you heard of the knowing-doing gap? Accumulating unique knowledge – expertise, processes, experience, skills, recipes, qualifications etc – is important, as we always emphasize at Economics For Entrepreneurs. In business, that’s half the story. The second part is effective action, judged by results. Knowing what to do translated into actually doing it. Becoming not just a learning organization but a doing organization.

Dr. Per Bylund framed it this way: having a great idea for a business is not the crucial element for success. It’s whether you can pull off the idea in implementation. That’s what investors and customers are looking for – not the idea, but executing the idea.

Key Takeaways & Actionable Insights

Dr. Bylund guides us with 5 Austrian action principles.

5 Ways to Analyze Executional Excellence

Principle 1: Consumer sovereignty. The consumer is boss and decides whether a business is executing well, i.e. to customers’ satisfaction. The only purpose of a business is to make and keep customers. Amazon calls this customer obsession – everything starts and ends with the customer, and the customer is central to every decision, in every resource allocation, and is invisibly present in every meeting and presentation. Does your company act this way? Are you certain you know and understand your customers’ needs and preferences, and their hopes and dreams? Are you deeply immersed in customer knowledge? Do you talk one-on-one with customers as often as possible? Do you go out to the building sites where they use your equipment, or to the offices where they use your software, or to the homes where they consume your food and beverage products? The consumer culture is exemplified by anthropology – getting out there with your users. Jeff Bezos observes that consumer-obsessed companies act differently. What actions are you taking to observe, understand and serve individual customers better?

Principle 2: Subjective Value. The consumer or customer you are getting close to by implementing Principle 1 is the decision-maker on whether or not your firm is providing value. Their decision is subjective – it’s entirely theirs, entirely emotional, entirely about their perception. Do you know what factors are the most persuasive and influential in creating a positive perception? We discussed a case study of premium vodka. The basic liquid is to a great extent an undifferentiated commodity. Differentiation comes from the varied subjective experience a consumer can feel in ordering and consuming and sharing a brand of vodka. How much of that perception is affected by the bottle shape design and the label design? How much by the social prestige of the location where the brand is served? How much by the consumer’s perception of the merit of the people who drink this brand? It’s hard to know but necessary to find out.

One route to implementation success in business is to manage expectations. Find out what customers expect, then make a promise to meet those expectations and keep your promise. So often in business, promises are made but not kept. That means you created an expectation, then did not meet it. You should make sure to do the opposite.

Principle 3: Dynamic Resource Allocation. The Austrian principle is that the firm’s capital and resources are, at all times, a reflection of the market and of customer preferences. What does that mean and how can a firm activate this principle? In practice it means two things. First, do not lock in to any asset or resource that is difficult to change or adjust on short notice. Stay flexible at all times. Second, make sure that you are collecting market signals – data – that tell you what you need to know about customer preferences today (not yesterday) and will provide you with insights into where they might shift tomorrow. Based on those insights, conduct experiments and tests that can be quickly scaled up when they show results, and quickly shut down when they don’t. If you find yourself responding to changes in customer preferences – or, even worse, changes in competitors’ behavior that seem to be more responsive to customers than your own – it’s too late. Get comfortable with continuous change.

Principle 4: Dynamic organization. How can you identify and eliminate all the barriers to your team’s empowerment to serve the customer in the way the customer prefers? Often, the barriers can be found in rules. In customer service, for example, there may be rules about the level of decision-making delegated to a customer representative, or even the amount of time a representative can spend on the phone with a customer. Examine all your rules, standardized protocols and bureaucratic structures. For each one, ask: does this contribute to the satisfaction of the customer? Does it produce customer value? Or is it to cut cost and minimize risk? Cutting costs will never add value. To be great at implementation, examine all practices to make sure they are value-creating and not value-consuming. Who decides? Your customer.

Perhaps you have employees who are not value-creating. You can’t afford them.

Principle 5: Measuring The Right Things. With metrics, most business advice is to be objective and numeric. You are advised to measure sales, profits, distribution, etc., and take surveys of customer satisfaction expressed as numbers on a scale or percentages compared to a norm. For great execution, it is far more important to measure subjective value, and to shed light on what the firm is doing right in the creation of consumer value and where it is falling short. This is a challenge, but not an impossible one. There are places to look, such as sources of spontaneous praise. Your firm’s Trip Advisor comments from recent visitors, for example, if natural, honest and spontaneous, can be great indicators for you. The same goes for other spontaneous commentary channels. Commit to conducting a minimum number of in-person one-on-one customer conversations every week. Summarize them. Conduct sentiment analysis. Try to develop data on the direction that sentiment is trending – modern tools can do this via language analysis and emotional content analysis. Commit your firm to becoming the best at monitoring, projecting and analyzing subjective customer perceptions.

Do you have any experience of measuring subjective value creation? What has worked for you?

DOWNLOAD

PDF icon Download Our 5 Ways To Analyze Executional Excellence PDF (129 KB)

SUBSCRIBE

Apple Podcasts, Google Play, Stitcher, Spotify