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159. Rory Sutherland: An Austrian School of Marketing

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Rory Sutherland, Vice-Chairman Ogilvy UK, is a peerless marketing authority, revered throughout the business world. He published a blogpost with the title Wanted — an Austrian School of Marketing. In praxeology, subjective value theory, customer sovereignty, and ordinal value stacks, he identified the building blocks of a marketing approach for our digital age. We talk about it in Economics For Business #159.

Key Takeaways and Actionable Insights

Mainstream economics has the wrong narrative about capitalism and, consequently, a misconception about marketing.

Mainstream economics fetishizes efficiency, and regards marketing as a cost and an add-on business activity rather than fundamental and essential. There are multiple erroneous assumptions about consumer behavior such as adhering consistently to transitive preferences, perfect trust, and knowing to the penny how much utility will be derived from every transaction. Utility is defined in a circular fashion (consumers act to maximize utility / how do economists know what utility is / it’s the value that consumers try to maximize).

The influence of mainstream economics on business is to favor a focus on what Rory terms “instrumental objective means of business growth”, such as lower prices, and wider distribution. Business becomes obsessed with quantification, and, because value is not quantifiable, looks for other outcomes that can be quantified and used to justify investments. This approach misses the key point: that the marketing tournament is played out not in the objective arena, but in the subjectivity of the consumer’s mind.

Ludwig von Mises developed the science of understanding human behavior, and provided a unique economic underpinning for marketing.

Mises introduced the new method of praxeology, making Austrian economics an entirely different science than mathematics-based economics. It’s the science of human behavior, of action, and can be combined with psychology and evolutionary biology in the development of a superior mental template for understanding business.

For marketers, the most telling understanding from praxeology is the consumer’s drive to relieve uneasiness. Mises phrases it: “The incentive that impels a man to act is always some uneasiness.” Note the terms “impels” and “always”. These are powerful insights for marketers. But more is required for action: “the expectation that purposeful behavior has the power to remove ….the felt uneasiness”. This is the task of marketing: to create such an expectation.

The relief of unease is the consumer’s primary drive, and therefore the proper focus of marketing.

There is no need, as Rory phrases it, for marketers to “ladle on the positives” in their communications. Removal of unease works differently. It creates the expectation that uneasiness can be removed by actions the consumer takes.

Reputation, for example, is a reassurance to customers that they won’t be disappointed, and that promises made can, with some confidence, be expected to be kept.

A strong brand is a special form of such reputational reassurance.

Investment in a costly advertising campaign with high production quality can remove unease about the credibility of a seller — someone willing to invest in advertising must be confident that there will be widespread acceptance of what they’re offering, giving the buyer a corresponding confidence of not only quality but also social endorsement.

Guarantees, samples, and easy return policies are examples of widely used and effective unease-reducing marketing initiatives.

In fact, anything that reduces the work that customers need to do to enjoy the product or service (such as, for example, home delivery) can relieve unease and increase the value experience. Economists might call this reduced opportunity cost or transaction cost. Whatever the terminology, the unease-reduction approach is the most powerful marketing method.

One example Rory cited was that of zoom. While the technology has been well-established for some time, zoom was bedeviled by the problem of social unease in the early phases of its establishment. Is an electronic meeting as effective as an in-person meeting? Will a client think less of a service provider who doesn’t fly to see them, irrespective of the quality of the remote, technology-enhanced communication?

The analysis of unease — especially the socially-contextual unease inherent in a service like zoom — is a really important element in the understanding of value generation through marketing. Austrian school marketers can develop a special understanding by asking more questions about how best to reduce unease rather than how to increase desirability. Rory used the example of range anxiety for potential buyers of electric vehicles. Their anxiety about possibly running out of power before finding a charging station might be irrational based on their physical environment and infrastructure, but the anxiety nevertheless governs purchase and usage and demands relief.

Marketing is built on an Austrian understanding of customers and their subjective heuristics of value perception.

Customers’ perception of the potential for the relief of unease is subjective and emotional. The appreciation of goods and services is not merely a product of their objective characteristics. Value for consumers can be created through psychology, not just through production. Value is a consumer experience, an emotional response driven by a subjective sense of what matters to them, embedded in context, story and meaning.

Changing consumer behavior is not a function of the objective reality of product and price. Marketers who focus just on these elements are “playing with a limited deck”, in Rory’s words. The presentation of a good or service to customers is fundamental to the value proposition. It’s not an add-on or an optional extra for business. Marketing can change customer’s minds through reframing, through changing the social context, or through any one of many, many more ways to change how they look at things.

Consumers evaluate through heuristics rather than rational calculations of economic benefits and costs. The marketing power of brand or reputation is a customer heuristic: a firm that has invested in its reputation through quality and service, reliability, and consistency in keeping its marketing promises, as well as cultivating its online ratings, will be rewarded in the marketplace. Customer disappointment — resulting from a failure to consistently keep promises — will be punished. Reputation and disappointment, of course, are subjectively perceived.

Austrian marketers thrive on the feedback loops.

As Rory puts it, some people like plain white bread and some will pay $10 for a sourdough olive focaccia loaf. Marketers explore all the possibilities in a market — they embrace the messiness of customer preferences and the whimsy of their choices. Perfect competition deprives customers of these whimsical choices; it commodifies what’s offered by suppliers.

If markets were designed by suppliers there’d be less variance but also less resilience (fewer options). Markets are designed by consumers and value is created in customer-initiated experiences, facilitated by suppliers who listen and respond well. Consumers get what they want via feedback loops, sending signals back to the marketer about what they want and don’t want, and what they’ll buy and won’t buy.

Brands especially welcome market feedback so that they can align more and more tightly with consumer preferences, and customize the branded experience to an ever-greater extent, reinforcing the brand-consumer bond. It is the consumer feedback loop that drives innovation. Marketing is the listening and alignment function. It’s essential to the workings of capitalism. It is the tool for synthesis of value through the imaginative redefinition of what people value, based on their signals.

It is the Austrian perspective that deals so well with the unpredictability of marketing successes.

Another limitation of conventional economics and quantification-obsessed businesses is the search for one right answer. Such restricted models of reality are dangerous. What capitalism and marketing are good at is coming up with multiple answers — increasing the potential solution space for problems, and increasing the number of ways to relieve unease.

The answer to any customer demand is never one thing, it’s multiple options for different value-uncertain customers to choose from. Sometimes there are what Rory calls “opposite things” (Red Bull and Coca-Cola) or sometimes multiple different things (a wide range of single serve beverages for a wide range of consumers in a wide range of situations).

Rory is an expert on unpredictable marketing successes. In his book Alchemy, he describes the “magic” of marketing and some of its unpredictable outcomes. One of the notable ones was the success of Red bull, a beverage brand that, according to research among its own consumers, “tastes kind of disgusting”. The testing agency had never seen a worse reaction to any new product. Why is there such unpredictability? As Rory puts it:

Models of human behavior devised and promoted by (mainstream) economists and other conventionally rational people are wholly inadequate at predicting human behavior.

Red Bull “hacks the human unconscious”. It has potent associations with risk taking behavior, with myths about the power of caffeine and taurine, with perceived signaling effects, and with several more psychological placebos. These have nothing to do with product and price, and make the success of Red Bull unpredictable.

Another way to say this is to call Red Bull’s success an emergent property. The future is unpredictable, but so is the past (we can’t really explain Red Bull’s success), even though we attempt to post-rationalize. It’s just one of several possible outcomes and we don’t truly know the story and how it happened.

Austrians’ embrace of emergent outcomes in free markets with freedom of choice makes marketers perfectly comfortable with unpredicted outcomes.

Much of business success is luck, instantiated by entrepreneurship and enabled by marketing.

As a consequence of this unpredictability, extraordinary business success is a function of luck and timing. Business outcomes are largely probabilistic rather than deterministic. Sadly, 80% of the effort in business is applied to pretending that it is deterministic — in the form of planning and strategy activities for example.

The time and place of “take off” for new innovations and marketing campaigns is entirely unpredictable. There are two influences that can bring a little more certainty. One is the role of the entrepreneur, who is likely to be more single-mindedly focused and more persistent in betting on a single innovation than a larger corporation that has a portfolio and a risk-averse bureaucracy.

The second is marketing, which has the capability to change customer psychology and change their frame of reference, transforming a bleeding edge concept into something inevitable and compelling. Early-stage adopters are often seen as somewhat crazy (i.e., there is limited socially contextual acceptance for the innovation), and marketing can accelerate the adoption curve by reducing or eliminating the value uncertainty of more customers more quickly.

Importantly for marketers, Austrian economics takes a process view of markets, in which people and their preferences and their individual and social behavior are constantly changing. This “constant flux”, as Mises worded it, gives energy to marketing as a stimulus for innovation, improvement, and promises of better alternatives.

Additional Resources

“The Austrian School Of Marketing” (PDF): Mises.org/E4B_159_PDF

Rory Sutherland’s blog post: “Wanted — an Austrian School Of Marketing”: Mises.org/E4B_159_Blog

Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life: Mises.org/E4B_159_Book

Rory Sutherland on YouTube: “Praxeology: Time To Rediscover A Lost Science” (There’s a special frame at 8:10): Mises.org/E4B_159_Video

For Greater Business Success, Turn Your Thinking Upside Down In These 6 Ways.

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There are sometimes revolutions in business thinking and business approaches that some of us miss because they originate in academia. There’s no pipeline for these ideas from their origin to their application in business firms. Academia is isolated, and businesses are too busy to search for the information and make the adaptations necessary for effective application in the real world. But there’s value to be uncovered and released, if businesses put in the effort.

One such revolution began with an article in the January 2004 issue of the Journal Of Marketing by Stephen L. Vargo & Robert F. Lusch, titled Evolving to a New Dominant Logic for Marketing. The underlying logic was simple:

Marketing inherited a model of exchange from economics, which had a dominant logic based on the exchange of “goods,” which usually are manufactured output. The dominant logic focused on tangible resources, embedded value, and transactions. Over the past several decades, new perspectives have emerged that have a revised logic focused on intangible resources, the cocreation of value, and relationships. The authors believe that the new perspectives are converging to form a new dominant logic for marketing, one in which service provision rather than goods is fundamental to economic exchange.

Stephen L. Vargo & Robert F. Lusch, Evolving to a New Dominant Logic for Marketing, Journal of Marketing January 2004

The authors called their new logic “Service-Dominant Logic”. The source article has generated a still-ongoing torrent of further development and discussion. The idea of a revolution in business thinking – a new dominant logic – has been very compelling. The authors referred to the new ways of thinking as “inversions” – turning traditional thinking upside down. Here, for example, is a summary of a 2015 article of theirs in Marketing Theory: Inversions Of Service-Dominant Logic. Inversion #1 is the one that particularly caught my attention.

1. Entrepreneurship over Management

Much of management thought has its roots in the Industrial Revolution, focused on control of large, bureaucratic organizations. The hallmark is efficiency, with bureaucratic central planning and top down management command and control, extended to sub disciplines such as marketing management, human resource management, customer management, financial management, supply chain management and information systems management. Entrepreneurial approaches to business are seen as the exceptions, such as start-ups, small business.

Entrepreneurship should be viewed as the rule, rather than the exception. Systems generate value through resource integration and service exchange in a continuous flow of emergence. There is no end state to optimize or to manage towards. Business is the ongoing discovery of new solutions to evolving human problems – market making. Entrepreneurial activities are fundamental to value creation in ecosystems. Management of bureaucratic firms is a special, limited case, temporarily required in institutionalized forms in institutionalized markets.

2. Effectual over Predictive Processes

The theory and practice of management is anti-entrepreneurial. Writing and building detailed plans about highly institutionalized markets, supported with detailed financial predictions that become the guiding framework for management action, resource allocation, marketing strategy and control. It’s a Newtonian view: maximizing economic value to shareholders via pulling levers of product attributes, price, promotion and channels to produce the result. A bureaucratic structure is established and management is a rules-based activity to be “played” correctly.

Effectual processes assume the future is unpredictable. Human action can shape outcomes through the exercise of choice; goals are emergent, changing and negotiable. Planning is counter-productive, and uncertainty and unpredictability are embraced as opportunities for market making or reshaping and new approaches to value generation. Learning comes from trying and imagining. It’s the natural practice of human actors.

3. Marketing over manufacturing.

In management, there is a focus on being “productive”, with a primacy of “product”, which can be traced back to Adam Smith and the beginnings of the Industrial Revolution. National wealth could be advanced through the application of labor (applied specialized knowledge and skills) to create tangible, exportable goods. A preoccupation with manufacturing and productivity led to affordable supply exceeding market development and hence to the systematic study of marketing – in a supporting role to manufacturing: taking units of output to market to be sold. Marketing has been trying to dig itself out of this stepchild role. 

Service-Dominant Logic sees marketing as primary: the creation, increasing and recreating of markets (through innovative approaches to resource integration and service provision) as the essential purpose of the firm. Marketing and innovation are the same. 

The firm is removed from a primary, central role in value creation to the role of participant in the value creation process for others in the context of service ecosystems. Marketing is a transcending function. It can’t be outsourced.

4. Innovation over invention

invention is an isolated device or process. To become innovations, they must be connected to actors in service ecosystems to become institutionalized solutions to human problems through co-ordinated development of a supportive, contextual environment. Value is created through innovation, not invention.

5. Effectiveness over efficiency

The Industrial Revolution pursued efficiency: productivity, doing more and more with fewer and fewer resources, and the elimination of “waste”. It’s producer-centric. Effectiveness is a user-centric concept, captured in value-in-experience. Without effectiveness, efficiency is a moot issue. Understanding this relationship is critical to innovation and value generation. 

6. Heuristics over rationality

The rational decision-making of homo economicus persists in neo-classical economics, even in the form of bounded rationality. Heuristics can be more robust for human decision-making than calculation, and play an important role in decision making. Heuristics work for people because they are adapted to their environmental structure, including institutions that provide short cuts to value-related decisions. Rationality is a subcategory of heuristic thought. 

Turn Your Thinking Upside Down

These inversions are thought provoking. They seem entirely appropriate for our time. Ask yourself what other aspects of your business thinking merit this kind of re-examination and inversion. Nothing is sacred.

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

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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.

 

52. Mark Schaefer: The Future of Marketing Is Austrian – How Human-Centered Marketing Can Fix A Business Function That Has Lost Its Way.

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This week I spoke with Mark Schaefer about his iconoclastic and deeply insightful book Marketing Rebellion, in which he expounds the solution to modern marketing’s failures, via an approach he calls Human-Centered Marketing.

Listeners to Economics For Entrepreneurs and aficionados of Austrian Economics will recognize the close overlap between Austrian Economics and Human-Centered Marketing.

Key Takeaways & Actionable Insights

Marketing has lost its way – in its current state, it’s no longer a useful business growth tool for entrepreneurs.

  • An obsession with technology has eclipsed the focus on people and human values.
  • A mania for measurement has obscured emotional connections with customers.
  • “Marketers hide behind their dashboards” and are not conducting conversations with customers.

The solution, says Mark Schaefer, lies in the principles of Human-Centered Marketing. Austrians can easily recognize these principles as our own.

Austrian Principles vs Human-Centered Marketing Principles

Click on the image to download the full PDF

The customer-sovereignty perspective yields actionable truths.

  • Customers don’t need ads – they don’t see them, they don’t hear them, they block them.
  • Customers are rebelling against the interrupt-and-annoy approach of marketers.
  • The customer is in charge.

What do customers want from marketers? The answer for Mark Schaefer lies in Core Human Truths – what Austrians call Highest Values.

  • They want to feel loved.
  • They want to be respected
  • They want to belong
  • They want you to advance their self-interest
  • They want proof that a firm or brand is contributing to their community

These are deep human needs that don’t change. Whatever the speed of change in market, these values are constant. Humanism lets marketers hold on to what is not changing, rather than being overwhelmed by change.

Marketing mantras like “loyalty” and “engagement” are false.

  • Customers don’t want to be loyal; they want freedom and choice – they like shopping around.
  • Engagement does not result from clicking on an e-mail and downloading a white paper or a coupon.
  • These are dashboard measurements, not human values.

Mark’s recommendations are grounded in humanism.

Customers respond to shared meaning and shared values – so long as the sharing is authentic. Businesses must be loyal to consumers, never let them down, always be consistent. Live on their island.

Seek trust. Marketers have burned through trust. The Edelman Trust Barometer shows trust in business and brands and advertising going down for 11 straight years. Now brands must transcend the public’s mistrust.

Flip your branding. A brand is not what you tell customers. A brand today is what customers say about you to their friends and peers. People trust other people.

Let customers create their own value. This is pure Austrian Economics: customer value is an experience that takes place entirely in their domain. Brands and businesses facilitate – but can’t create – the customer’s value experience. Customers hire your brand or business or product or service to help them create value.

Marketing is promise management.

  • Choose the promise you make to customers carefully – is it one they really want from you and will they trust you when you make it?
  • Ensure that you have the capabilities to deliver on the promise. Don’t over-promise.
  • Keep your promise every time, with no exceptions ever.

BONUS: Small and medium businesses have an advantage in human-centered marketing.

The larger the business, the harder it is to connect to customers on an individual, emotional level. Small business has an advantage in showing its face, demonstrating its personality and exhibiting trustworthiness.

Items Mentioned In This Episode

Mark Schaefer’s Human-Centered Marketing Manifesto is here. 
For comparison, our Menger’s Manifesto, from Principles Of Economics, is here. 
Find Mark’s book, Marketing Rebellion, here.
Mark’s website is https://businessesgrow.com 

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6. Ricky Porco on Types of Entrepreneurs

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At Economics For Entrepreneurs, we believe that everyone can be an entrepreneur, should they choose to do so. It may take you some time to find exactly your best niche, and a few experiments may be in order. The right mindset, we propose, is to pursue your entrepreneurial goal with belief and commitment, while being sufficiently adaptive to make some adjustments along the path when new information and new learning becomes available.

This week we spoke with Ricky Porco, a young CEO who already has several entrepreneurial experiences to his name. He’s been co-founder of an innovative community-building platform, and of a software development company.  He’s also been a marketing, sales and do-it-all guy at a digital marketing agency, and now he runs a service company to help small businesses make the transition from paper to digital – i.e. he’s an entrepreneur who supports entrepreneurs.

Show Notes

Starting entrepreneurship early in life is an advantage. Ricky tells listeners how he started his entrepreneurial career in college, packing a lot of learning into a short period of time. It’s a permanent advantage he’s carried forward with him into every subsequent stage of his journey.

It might take you a few tries to understand what kind of entrepreneurship is best for you. You might expect to switch businesses two, three, four or more times, changing markets, organizations, and business models. Make sure you make your choices purposefully, and commit to active learning from each one.

You might even try life as an employee to learn by comparison. Ricky switched into the role of employee at one stage. He was able to observe how the boss he reported to struggled with management and growth, and learn from it, while gaining confidence in his own skills through his success as a rainmaker for this employer.

You quickly find out the importance of financial management. Ricky quickly found out that he and his co-founders were good a business model design, product development, marketing and sales, but a start-up is financially immature by definition and can easily run out of cash. Without sound and disciplined financial management, all the other skills and capabilities can count for nought.

And you also quickly find out that effective marketing is essential to every business. Some of Ricky’s clients see marketing as optional – “if there are funds left over”. The opposite is true: marketing is a fundamental requirement.

Organizational structure and design is a critical factor in success, and especially in opening information flows. The biggest threat to the entrepreneurial success of a firm is a clogged information flow, when employees or partners don’t have clear direction or timely data. This can easily happen in founder-centric companies and especially in family-owned businesses that tend to be hierarchical.

Digitization is the best opener of information flows: software is organization. One simple solution to the clogged information flow is digitization. Software solves the problem; there’s no hierarchy in Slack.

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