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Re-thinking The Role Of The Consumer In The Business System: Making Six Strong Connections.

A breakthrough paper published by Dr. Per Bylund and Dr. Mark Packard in January 2021, titled Subjective Value In Entrepreneurship, points to ten radical shifts in business thinking. We consider each one in turn. This article is number two in our series. (Previous articles here and here.)

Producers produce, consumers consume. Producers innovate, consumers enjoy the benefits of innovation. Producers pursue new ideas and new economic value, consumers evaluate and choose.

These are typical mental models of the business system. What if they are painting the wrong picture? What if, in representing the flow of production, innovation, ideas and value from the producer to the consumer (or the B2B customer), they are missing the fundamental mechanism of economics?

That is one of the questions asked by Dr. Per Bylund and Dr. Mark Packard in their paper Subjective Value In Entrepreneurship. In it, they propose a different image. Rather than a one-way flow of value from producer to consumer, they suggest that the producer and the consumer are equally engaged in a joint quest for value. The flow is two-way, not one-way. 

One of the implications of this new perspective is to attach greater importance to the connection between the entrepreneur and the consumer, and to study this connection with greater intensity, rather than to focus on the behavior of the entrepreneur or the behavior of the consumer in isolation. 

To immerse ourselves in this new way of thinking about the consumer’s role, a new mental model helps. In the new model, the consumer can be viewed as a dynamic bundle of connections to various resources. The consumer is assembing a system – to run a household, or to run an office, or to implement some specific task in as efficient and effective way as possible, i.e. best result at lowest cost. To supply the system with the required resources for its operation, the consumer connects to supply sources: for the household system the connections might be to a supermarket, a dry cleaner, an array of other retailers, a few gas stations, the local water and energy suppliers, audio and video entertainment services, internet and PC, some expert services (an electrician and a plumber, for example), one or more schools, doctors and healthcare services. There are many more of course. Think of a cloud of service connections surrounding each individual consumer and family. We can imagine a similar cloud for a B2B customer.

Whether consumer or customer, the value generation system is big and complex.

A producer who seeks to provide services to the consumer should first develop the mental model of all the existing connections the consumer has already assembled in their cloud, and is currently monitoring, managing and evaluating. For each one, the consumer continuously applies a set of value questions: was my most recent experience as valuable as I wanted it to be; do I continue to rank the value of that experience value higher than alternative satisfactions; do I feel the cost of exchange is less than the value experienced? This ongoing valuation is a dynamic swirl of continuous change, with different satisfactions and services simultaneously rising and falling in their relative ranking in the consumer’s mind.

With each act of valuation, the consumer emits a signal for the alert entrepreneur to pick up: dissatisfaction or satisfaction. The signal can be understood in terms of the consumer’s interaction with the world of goods and services providers, in the context of a never-ending quest for a higher value state. The entrepreneurs and businesses that have developed the strongest connections to the consumer will be best placed to intercept and translate the value-seeking signals.

The Six Strong Connections.

Mark Packard Episode Cover Photo

Alert businesses develop their connections along multiple dimensions;

The Information Connection: consumers are imparting information in their desire for greater value, and the smart business develops excellent information-receiving capabilities. The well-tuned connection is not so much information-gathering (i.e. intentional queries such as surveys) as a cultural disposition to hear and listen, especially at the front lines of direct contact with customers.

The information connection is two-way. Successful businesses fine tune their information provision to the customer, aiming to ensure that it is personalized, specifically relevant to a declared value desire, and additive to the knowledge they need to support their decision-making. Happily, “spray and pray” advertising tactics have been abandoned. Personalization of digital communications is a big advance for businesses, so long as they avoid the feelings of “interruption and annoyance” that can be the unintended consequence.

The Value Proposition Connection: from the listening connection, businesses can craft a customized value proposition, a proposal to address the customer’s search for greater value. This connection must also be two-way. How does the customer react? What is the level of belief? Is the customer prompted to learn more about the firm making the proposition? How does the customer feel about this value proposition compared to alternatives? If there is no feedback loop, the business is unable to answer these questions and unable to advance further through the value process. 

The Evaluation Connection: consumers are engaged in continuous evaluation of their alternatives within the value system they have created for themselves. Businesses aim to be part of the evaluation process, providing knowledge where it is requested, and responses where they are called for.

The Exchange Connection: too often, it is the exchange connection between customer and provider that is emphasized at the expense of all others: it becomes the sole end of interaction for the business, whereas it is better (and more profitably) seen as one component in the cloud of connections surrounding the consumer. Certainly, a completed exchange connection – i.e. an economic transaction – indicates a successful response by a business to a consumer’s signal; however, it does not say anything about the probability of future connections.

The Experience Connection: subjective value is experienced uniquely by the consumer, so this connection is the most distant for the producer. The only role is as observer, monitoring the experience. The monitoring can be funneled through feedback loops to the designers tasked with making the experience as valuable as possible.

The Assessment Connection: the consumer’s assessment of the experience is more accessible to the producer, because the consumer is much more liable to articulate the details of the assessment, whether as complaints or praise. A strong connection would deliver far more nuance, of course, especially in the consumer’s conditional language of “It would be better if….” or “I wish…..”.

When business truly grants the consumer / end-user the role of equal partner in co-navigating towards a higher value, these six two-way connections are established, always open, and serve as freeways of co-creation.

The New Economics Of Value And Value Creation.

A breakthrough paper published by Dr. Per Bylund and Dr. Mark Packard in January 2021, titled Subjective Value In Entrepreneurship, points to ten radical shifts in business thinking. We consider each one in turn. This article is number two in our series. (Previous article here.)

There’s classical economics and there’s Austrian economics. There’s classical physics and there’s quantum physics. In each case, the emergence of the new science requires rethinking of the “rules of the game”. In the case of quantum physics, not everything about Newton’s Laws, or even Einstein’s Theory Of Relativity, can be thought of as accurate any more, and the things we think of as existing in spacetime (the three dimensions of space plus the dimension of time) are not everything that exists nor everything that is real. It is the study of energy at the smallest possible scale in quantum physics that reveals new insights and new knowledge. At this level, the rules are different.

The equivalent perspective in Austrian economics comes from methodological individualism – the study of economic energy at its smallest possible scale: the individual, individual choices, and individual transactions. These interactions and transactions roll up into the complex, swirling, ever-changing systems we call firms, markets and, ultimately, economies. But it is the study at the individual level that yields new insights and new knowledge, just as in quantum physics.

It is in this spirit that Dr. Bylund and Dr. Packard approach the subject of economic value. Progress in the world is the creation of new economic value. Who creates it? The answer is not what most people think. Consumers create value. That’s because value is a feeling, the emergent outcome of an experience that the consumer judges to be of value to them. Their assessment occurs in their own mind, after the event of the experience, and is entirely individual. Value is, in other words, subjective. There is no value without consumption.

This realization compels a re-thinking of the concept of value in business. It is typical, today, to talk of businesses as “creating value”, and to think of some firms as creating more value than others as a result of competitive advantage or superior strategy. The methods of measurement for these assessments usually involve financial variables such as profits or stock price appreciation or margins.

But this approach is not accurate, and it’s not right. Businesses, firms and entrepreneurs and their brands and offerings are parties to value generation. They’re just not the creators, because there is no creation without consumption.

So, if they don’t create value, what do they do? They pursue new value on the customer’s behalf and they capture some portion after customers create value, providing themselves (and, by extension their customers) with the sustainability required to continue to offer innovative value propositions in the future.

Here’s how that process works out

Identifying value potential in response to customer signals.

After customers create value in consumption, they evaluate it in comparison to their expectations and to alternative satisfactions they could have chosen. If there is a discrepancy on the downside, they emit a market signal we call dissatisfaction. The genius of customers is to be able to identify potential improvements through this mechanism of dissatisfaction. They are always seeking a better experience, no matter how good the latest one might be. In this way, they are the driver of innovation and economic growth.

But dissatisfaction signals are not always easy to interpret. The famous observation attributed to Henry Ford applies: if I’d asked them what they want, they’d have told me “faster horses”. Ford’s customers were dissatisfied with the transportation experience offered by the best horses (and carts) of the time, but couldn’t wish for the inexpensive automobiles that Ford eventually developed.

We could say that Ford identified the value potential in the desire for faster horses. Consumer signals require interpretation, and that constitutes one of the major contributions, and major skills, of entrepreneurial businesses.

Value Facilitation

Once value potential is identified and confirmed, the role of business is to make it easy, convenient and enjoyable for customers to experience the new value. Value facilitation means taking a proposed new or improved product or service all the way to the point where the customer can buy it and experience it. We might say that value facilitation is the traversing of the last mile and the last foot into the customer’s domain.

Facilitating value means making the least amount of work for the customer. We don’t think about work as something the customer has to do. But the concept is important in identifying barriers to purchase and barriers to usage. If the customer has to learn new software, a new interface that doesn’t work the way they’re used to, or a new car dealership whose customer service process is different, it’s all work. If a customer has to drive to a store instead of accepting delivery at the office or home, it’s more work. If a truck requires more maintenance, it’s more customer work. If the customer must do some research to find out about a brand that was previously unknown to them, it’s more work. Economic science recognizes the disutility of work. If there’s a possibility of achieving a benefit with less work, that’s the benefit the customer will choose.

Value facilitation is the business activity of minimizing the amount of work the customer must do to experience the benefit on offer, reducing the barriers to purchase and usage to zero.

Capturing value

When the value facilitation process is taken to the max – the last foot – the value experience is ready for capture.

On the customer side of the transaction, the final step is translation of their value assessment (which includes the weighing of multiple value perspectives, and especially relative value compared with what else they could use their money for) into a monetary expression we call willingness to pay. The willingness to pay means the customer perceives more value in the potential experience on offer than in holding on to their cash or using that cash for alternative purposes. It can only occur when the benefit they anticipate exceeds the price asked by the entrepreneurial business making the offer. There might be some negotiation (special promotions, discounts, coupons, incentives, and so on) before the willingness to pay is finalized and expressed in a purchase.

The customer captures value by buying and using and experiencing what they bought. This might be immediate (like an ice cream cone) or delayed or spread over time (like a car). 

The business captures value when they receive the cash, and subtract all the costs of production. The quality of the business model determines how much of the value the business captures, and how much is lost to costs or shared with partners in the value delivery network or supply chain. Some business models capture more value than others. For example, selling direct to consumers via the internet usually empowers sellers to capture more margin than going through a 3rd party retailer and wholesaler network and sharing margin with them. There’s both more value for the consumer (delivery versus pick-up, speed, convenience, etc) and more to be captured by the producer.

Besides negotiating price, the producer’s role at this stage is to monitor the customer’s value experience – did it go smoothly, did it meet expectations, are there any dissatisfaction signals to be picked up?

Value agility – strong feedback loops and responsive innovation.

Value facilitation is never complete. The entrepreneurial business must become adept at reading consumer signals after the value experience and value capture. This is accomplished by keeping open the feedback loops from the end-user to the business – contacting, monitoring, listening, processing, and ensuring that the feedback enters and is absorbed by all parts of the business, not just the call center or the marketing department. Every part of the business should be entrepreneurially empowered to respond to end-user reactions and signals. A firm with value agility is organized differently, with every possible touchpoint and listening point ready with a response.

This value agility and readiness spontaneously organizes continuous innovation, making changes to firm behavior, policies, outputs, services and delivery to aim for the best possible accommodation of changing and evolving customer requirements. Continuous change is the norm for the entrepreneurially empowered firm.

Quantum Economics

In quantum physics, entities in a quantum state emit what are called “offer waves”. Other quantum entities absorb these offer waves and send out a “confirmation wave”. When the offer wave and confirmation wave match, a real-time event occurs as a result, although very rarely, because the quantum states and offer waves are continuously changing. The quantum states and the offer wave and confirmation wave are real, but they do not occur in the dimensions of spacetime (the three dimensions of space plus the dimension of time that are the “container” for everything we can observe and experience with our senses). They occur in quantumland – a land of probabilities, possibilities and potential that are not yet quite real to the human observer.

The economics of value can be thought of in the same way. Consumer dissatisfaction is the emission of offer waves: I will be your customer if you can solve my dissatisfaction. Entrepreneurial action can be thought off as the confirmation wave, sometimes but rarely providing the right response and precipitating a real event, a transaction. 

There is no concept of cause-and-effect or stimulus-and-response. The offer wave and confirmation wave exchanges are occurring simultaneously, at all times, in all directions, amidst continuous change. Professors Bylund and Packard painted the picture of consumer and entrepreneur co-navigating a sea of uncertainty in a shared quest for a higher value state. Each has a role, but neither is the stimulator or responder. Both of them play both roles at the same time. The new rules of value require us to think differently than we’ve been taught in the past.

Watch this video for a quick review of the 4V’s Business Model

A Radical New Vision Of Value Creation And The Value Roles Of Consumers And Entrepreneurs From Professors Bylund and Packard.

Hunter Hastings:

Mark and Per, welcome to this somewhat experimental edition of the Economics For Business podcast. Experimental in the sense that we’re going to have a three party discussion for the first time.

Mark Packard:

Hey Hunter. Hey Per.

Per Bylund:

Hey, thanks for having me, Hunter. Good to see you again, Mark.

Hunter Hastings:

With the occasion of having you both here at the same time is the recent publication of a coauthored paper, it’s called Subjective Value and Entrepreneurship. And it really advances and changes the thinking and logic regarding the implications of subjectivism for businesses, for entrepreneurs, it changes how we define value creation. It changes how business schools are going to have to teach value creation, it changes how firms are going to think about their business models, it changes how product engineers are going to think about product design. It really is a big breakthrough, I think.

Hunter Hastings:

So let’s start with I don’t know whether to say subjectivism or subjectivity, you’ll tell me Per, but it’s based on a area that we’ve covered before about value centricity. It’s subjectively experienced by the consumer, and therefore any entrepreneurial business action, whatever it might be, must be viewed through a lens of consumer subjectivity. So wouldn’t you start us off Per with the overview of what you and Mark mean, when you talk about subjectivity in entrepreneurship.

Per Bylund:

Sure, it’s not actually very strange for listeners to the Economics For Business podcast, because we’re saying pretty much what we’ve been saying here on the podcast for a while, namely, that subjective value is the direct experience, sort of good feel that you get, the emotions, everything that you directly experience as a consumer in your consumptive action.

Per Bylund:

Whereas what we’re doing in the paper is really reacting to how… There have been steps taken in the direction of subjective value, but they’re not exactly recognizing value as subjective, what they’re doing is rather seeing that… They’re assuming that value exists out there, in some form or another. And that we have different views of it, that we see it differently. And some of us can see some of them perhaps, but none other values.

Per Bylund:

Whereas what we’re doing in this paper is taking the full step and saying that no, value is your personal experience. It doesn’t exist in any other way. So it is, whatever it is for you personally.

Hunter Hastings:

So one way of just explaining the terminology, as we say, value exists in some way that would be objectifying it and you’re saying, we can’t do that. It’s entirely subjective.

Per Bylund:

Exactly. Yeah. It is your emotion, it is your feeling, it is your experience. And that’s end of story. That’s it.

Hunter Hastings:

Good. And so if we look through that lens to identify some of the applicability to businesses and firms, then let me start at the, what I call the point of the spear Mark, you say value is created by consumers, and not by businesses or entrepreneurs. And that’s the big non breaking statement at the outset. Business schools claim to teach value creation, but it bears no resemblance to that.

Mark Packard:

Yeah, it’s certainly not what’s normally taught in business schools. But to be clear, Per and I, and I think others of the Austrian School, we typically shy away from the language of value creation, we define value essentially, as benefit, an increase in individual well being.

Mark Packard:

So in this sense, value isn’t really created, it’s experienced by consumers, there’s no value if a consumer doesn’t experience it. If you have a product on your shelves, that is collecting dust, that product is not valuable, because no one has experienced value from it. And also, as Per was just saying, value is highly subjective. And it’s not just idiosyncratic, which means that it’s unique to every individual. It’s not even objective in any sense, it’s experiential. And that means that it’s different for everybody. And it’s dependent on your conscious view of and understanding of that value.

Mark Packard:

So everyone’s experience is different. We experience things differently. We have different physical and psychological and emotional makeup that puts every experience in an individually unique context. So value is never the same across individuals. It’s always unique.

Mark Packard:

So yeah value emerges or is experienced by consumers on the demand side and not on the supply side, it doesn’t emerge on the supply side, nothing is truly valuable ex ante. A resource doesn’t have value. A resource may be valuable to us or we might value a resource because we predict that it will contribute beneficially to one of these consumer experiences. But at that point, it’s only a prediction.

Hunter Hastings:

So pushing that a little bit further with value as an experience on the consumer side, you’ve talked about this before, but you repress it in the paper a little bit. It’s not even a one time experience, we can’t even narrow it down to that. It’s a process and more specifically a learning process. So take us through that, again, as you do in the paper, Mark, the implications of value as a process?

Mark Packard:

Yeah, I think this is a fascinating point, our lives and our whole human experience is this never ending value learning journey. Everything we do is toward a higher valued state, whether it’s production so that we can consume, or if it’s consumption, so that we can realize those benefits that we’re trying to get. But we don’t innately know precisely what we need, or even should want to make us as well off as possible.

Mark Packard:

From the moment that we’re born, we start searching for solutions to our pains, and our dissatisfactions. And we keep learning what to want and what not to want through our firsthand and secondhand experiences. And we keep changing and the world keeps changing. And there are new solutions to new problems. And until we reach what I call the Nirvana equilibrium, which we never will, where we’re perfectly and perpetually in a state of perfect euphoria, then we’re going to keep searching and keep learning and trying to resolve those remaining dissatisfactions.

Hunter Hastings:

And one of the ways you express in the paper Per that learning process, the consumer goes through is that they suffer from or they experience value uncertainty. So we often talk about uncertainty, and we tend to think about it on the entrepreneur side. And we’ll get to that in a second. But the consumers got uncertainty, too, they can’t know, at the point of purchase, or even at consumption, whether they’re going to experience value. So take us through the implications of that for the consumer.

Per Bylund:

And I think we all have the experience of buying a product and then being disappointed with how valuable it actually is, or how useful it is. And maybe we bought something and it sort of bought the idea of us being different people or it propelling us into a different career trajectory, or whatever or maybe it’s just a simple meal at a restaurant where we think that, “That sounds really great. And I’m going to try that.” And it’s not really all that satisfying.

Per Bylund:

So even when we have the product in front of us, and we can sort of extrapolate and guess what that good might do for us, we have an understanding or an idea of, and can imagine what it will get us and the experience we will get from it. But it doesn’t necessarily mean that, that is the experience we actually get from using the product. And that’s the uncertainty. So the more you have tried, the more experience you have, then probably you’re better at guessing how good that product is for you.

Per Bylund:

So what Mark mentioned in the learning process, that when you start out as a toddler, you don’t know a whole lot about anything. So you’re trying everything pretty much. But as a grown up, you know to stay clear of certain things that you don’t like very much, and so forth. But the problem is always a new product, a new good, a new thing to use that we don’t know exactly how this is going to satisfy us, even when we buy it.

Per Bylund:

And this of course translates to a huge problem for the entrepreneur because the entrepreneur needs to tell a story and sort of inform us of the possibilities and the value experience that we might get from the product, which is of course different for different people. But that’s why you have marketing and commercials telling a story and using pictures and colors and music and so forth to sort of convey to us as potential consumers that there is potential for value here.

Per Bylund:

Then the question of course is first do we believe it and then if we believe it, is it actually the case for us. So this, of course, goes back to the entrepreneur’s ability to sell us something more or sell us that service again. So when we go to a restaurant and we’re served a meal, and it was sort of poorly carried out, it wasn’t all that tasty that it looked like or whatever, we tend to not go back there.

Per Bylund:

So the entrepreneur’s problem is not only providing us with a good in the story, but also making sure that, in a sense, help us with a value uncertainty. And they can’t of course, because it’s our personal experience, but not lying is a good first step.

Hunter Hastings:

Yeah. And then just sticking with the consumer for a second. One of the props or tools that they use to do this evaluation work, you say is relativity, relativity of potential one satisfaction, I.E. they can at least go through the cognitive process of comparing the value proposition that’s in front of them with alternatives, and perhaps previous experience, you call it relativity marketing. That was your word. Can you explain that for us?

Mark Packard:

Yeah, that’s right. So everything that we value, we value relative to our opportunity costs, and actually more specifically to the alternative solutions that we typically use to satisfy that same need or needs as we understand them. So in other words to use Per’s example of the restaurant if I’m thinking about going out to eat for dinner, the value of a sushi place is not just relative to my valuation of other sushi joints.

Mark Packard:

It’s also relative to burger joints, and pizza joints, and steak houses and Indian food and seafood and everything else. It’s relative to all the other options that I have to satisfy that need. And you still have to go further than just these other restaurants, it’s also relative to the option of staying home and doing it myself, cooking my own meal. All of these options are available to me for the satisfaction of that hunger need.

Mark Packard:

And so I have to pick which is the best use of my time and money, for example, cooking at home saves me money, which I can use for other satisfactions, so to go out to eat, I have to give up those other satisfactions. But cooking at home also means I’ve got to clean up and do the dishes, which I also hate. So it adds an additional satisfaction component to that satisfaction experience, satisfying the hunger.

Mark Packard:

And so when you think about it, our minds do a remarkable amount of calculation when we choose and make these decisions. And most of it we do by instinct, which is pretty remarkable.

Hunter Hastings:

Yeah, I’ve got a picture of that going on inside my head every time I make one of those decisions, as you say, it’s pretty remarkable. Just as a sidebar, you did differentiate a little bit in the paper between consumers wants, and consumers needs. And I do personally get a little bit confused with that Per. So can you explain the distinction as you’re presenting it in the paper and how it might affect entrepreneurs thinking?

Per Bylund:

Sure. And Mark was sort of getting at that a little bit in his answer just a minute ago now. In the paper, we distinguished between a want, whatever is something you want, in a sense, it’s something you intend to use for satisfying whatever lack that you have, where I say need would be the core, sort of almost an objective component to it.

Per Bylund:

So Mark just mentioned the need to satisfy my hunger, which is not necessarily a want for any type of food. And it’s not necessarily a want for a restaurant either. So it’s broader. And this is sort of a little bit of a quibble, we have I think, about the relevance of distinguishing between wants and needs. Where I as an economist think that in a sense needs, it don’t matter, because we’re still acting on our wants, which is sort of an interpretation of how we can eventually get to those needs.

Per Bylund:

Whereas Mark would be more interested in the psychology aspect of it. And I guess we can discuss how relevant it is for entrepreneurs as consumers are still acting to satisfy their wants. But it could help to understand that there is a sort of a physical need behind a lot of products and a core that might be sort of objective that might be the same for a lot of people. I don’t know if Mark want to chip in here and give his sort of psycho analysis version?

Mark Packard:

Well, I will say that I’m right and Per’s wrong.

Per Bylund:

You got that wrong.

Mark Packard:

The way I see it and this goes back to kind of that learning model is that the need is, is critical, just because it is the satisfaction of the need per se that creates the objective experience from which the satisfaction and the experience arises. And so that… It is important to distinguish the wants from the needs, but the wants drive action, but the needs drive the kind of the response, the experience that we learn from and so influence future action. So that’s why I think it’s important.

Hunter Hastings:

So it has to do with consumer uncertainty in a sense. So you’re acting to satisfy a want, but whether that want actually satisfies a need? Well, that’s something you will find out for yourself in the experience. And the sort of discrepancy between the two is a big part of the uncertainty, right?

Per Bylund:

So I think that’s helpful. And I think of it in language, It’s much better if I’m a entrepreneur thinking about solving consumers wants or addressing consumers wants that’s the business I’m in and needs is some kind of higher state that the entrepreneur shouldn’t be thinking about. We use language about needs in a loose fashion that we should say once I think that’s how I interpret it anyway.

Hunter Hastings:

I want to take all of this, stay on the consumer side for a second. And I think what you’re telling is the consumer has work to do. They have this role of evaluating, and they’ve got some tools about relativity and the conditional nature of their decisions. But that’s a value processing task that they have. Is that a good way to think about the consumer’s role here?

Mark Packard:

Is this for me?

Hunter Hastings:

Either one, go ahead, Mark.

Mark Packard:

Yes. Our wants is perilous just explaining or actually predictive evaluations or evaluations, as I call them. That the predictions of value. And so we can imaginatively assess how much value we get from some new value proposition. And we formed once in comparing those imaginations but our value predictions are really fallible and uncertain, again, as Per was saying.

Mark Packard:

So when we consume, we also do what I call an assessment valuation. We reassess, or we assess that value experience itself, relative to our expectations of it. In fact, marketing theory argues that our experiences of satisfaction or dissatisfaction are actually comparisons to our expectations, they’re relative to those expectations. If we expected so much value, we’d be dissatisfied if we got less than that, even if it was actually pretty valuable to us.

Mark Packard:

So our expectations matter quite a bit in our value experiences and the assessment valuation is how we learn from those experiences and what we learn from those experiences? And from that learning, we decide what to want next.

Hunter Hastings:

So one of the ways I interpret that, tell me if you agree is that the consumer’s got a lot of effort here, got a lot of work to do. You say in the paper they have a job to do. It’s a discovery task and an innovation task. And you specifically say the role of value discovery and value innovation is the consumers, the entrepreneur can’t do it, because they can’t observe this evaluation.

Hunter Hastings:

So we’re giving work to the consumer, where I’m going with that is one of the implications for entrepreneurs in delivering convenience is think about that work. How hard does the consumer have to work to evaluate your offering and make it easier for them? Is that an okay way to translate what you’ve said here in the paper?

Per Bylund:

Yeah, I think so. That’s a good way of putting it. I mean, since we are arguing that value is completely on the consumer side and that value is the experience. And therefore that there is some certainty in the value for the consumer too. So this consumer seeks to get the value out of things, but doesn’t necessarily can be wrong. It does mean that for the entrepreneur, what they need to do is in a sense offer something that is potentially of greater value for consumers than other entrepreneurs are offering.

Per Bylund:

What that means is also that entrepreneurs can only get to the point where they facilitate value for the consumer, but whether the consumer actually chooses it, whether the consumer actually gets value out of it, that is really beyond what they can do. So whenever they sell the product, which can facilitate value for the consumer, the entrepreneur is sort of done.

Per Bylund:

I mean, the entrepreneur can, of course, offer service and whatever support might be part of the product as well. But as soon as the consumer has and uses an experiences the product, the entrepreneur can’t really do anything about it. So what that means is, is that yeah, the discovery of what the actual value is on the consumer side, it also means that the consumer might discover and innovate and figure out new ways of using the product, or service and also sort of find completely different uses for what the entrepreneur has delivered. And I think we’ve seen that throughout history and in the economy all the time that it happens when entrepreneurs offer a new type of product or device that whoops, people did not use this as intended, or as the entrepreneur expected.

Per Bylund:

Instead, they used it in a very different way, which turns out that, that’s in a sense, it’s a different product. So the entrepreneur can learn from this value innovation that the consumer is really providing to the marketplace, in a sense.

Hunter Hastings:

So let me try and sum up the revolution on the consumer side. I think it’s really critical, this idea of the consumers got work to do they got a valuation work to do, they’ve got uncertainty they’ve got to overcome. And in my head, I contrast that with the famous Clayton Christensen claim, which is about objectified value, I think that the consumer has jobs to be done and the entrepreneur’s offering can do it.

Hunter Hastings:

And we’re saying the opposite here that the consumers doing the job. And the entrepreneur can really facilitate that. That’s I think, that’s my way of saying what the revolution is, you’re giving much more weight to the consumers role in value generation, than has been the case in the past.

Per Bylund:

Yeah, we’re sort of shifting the boundary between the entrepreneur and the consumer. Whereas traditionally, it’s been the case that the entrepreneur delivers the product, which has the value, and then the consumer just has to use it. And then of course, it’s some weird psychological thing going on whether the person is satisfied or not. And there’s plenty of, I guess, space for the entrepreneur to trick the consumer. And the disappointment is sort of the entrepreneurs fault, whereas the implication of our new boundary between where the distinction between where value happens and where it’s facilitated means that there can be plenty of disappointment in a good or service on the consumer side completely.

Per Bylund:

So the consumer has made a mistake in expecting to get certain value out of a product, but didn’t, there was nothing wrong with the product, the product was exactly as described, but the consumer made an error. So the entrepreneur is not at fault. But of course, it might mean that the consumer is no longer trusting the entrepreneur, and will not buy anything more from the entrepreneur and what have you.

Per Bylund:

And I think what it also does is, it recognizes the larger role of the consumer. What it also means is that the entrepreneur becomes more of a servant of the consumer than was the case before. That, instead of being the guys in traditional sort of entrepreneurship, where you figure out a product, you produce a product, and then you just take it to market and then consumers get to buy it.

Per Bylund:

Instead, it’s your problem as an entrepreneur to figure out what could cause a valuable experience for the consumer, of course in competition with what other entrepreneurs are offering. And then make sure to continue and follow up and help the consumer through through the use of the product and make sure that the consumer gets a valuable experience out of it, which is much harder than it sounds.

Per Bylund:

But what it does is points out that the entrepreneur is sort of in the hands of the consumer, whether the entrepreneur’s successful. It depends on how much he or she helps the consumer to get a valuable experience.

Hunter Hastings:

Yeah, so let’s focus on the entrepreneur side now, we flip to that. One of the phrases I picked up from the paper that really brought it home for me is that what the entrepreneur is doing is producing the means for consumers to use for their desired satisfaction.

Hunter Hastings:

So that’s a very creative way to think about the role of business, I think. You’re producing the means but you have no control over how the consumer uses those means. So all you’ve got is watching, observing and monitoring what the consumer is doing, is that a good way to say it Mark?

Mark Packard:

Yeah, it’s a bit of a paradigm shift in the way we think about business. Again, we’ve shied away from this language of value creation, because value emerges in the experience of consumers. And this means that value isn’t created by businesses, right? The experience might be created by a business, but the value emerges out of the experience. And honestly, even that’s not entirely accurate, because really, it’s consumers who consume, right? It’s consumers who are actually creating the experience.

Mark Packard:

So what businesses do is really just facilitate the opportunity for that experience for consumers. So what we say is and I think this is much more accurate, is that businesses facilitate value experiences that are expected to benefit consumers. And that’s a very different way of thinking about what business’s role is, we’re providing the means, the resources, the tools.

Mark Packard:

And some businesses are experienced businesses, they actually create the experiential environment for the consumer to experience that thing. But it’s the experience that really, ultimately matters.

Per Bylund:

So if I may add to that, I mean, we see some of the errors that come from seeing what the entrepreneur does as value creation. We see those in policy, which are, in a sense, disastrous policy propositions, where a producer of a thing is going to be held accountable for what the consumer does with the thing. That doesn’t make any sense at all when you recognize that no consumers can innovate, they can figure out whatever they feel like and have whatever experience they feel like for that good, whatever it is.

Per Bylund:

So the producer has no influence really over what the consumer does with a product, which is pretty obvious for anyone running a business that when you have made the sale well, if they resort to throwing the tomatoes they bought on people, instead of eating them well you can’t really do anything about that at all.

Per Bylund:

I mean, if you sell hammers, they’re intended to be used in construction work or what have you. Well, someone takes the hammer and bashes someone’s head in, that’s not the intention. But it’s sort of an innovation on the consumer side, not very productive one, but still. So holding producers responsible for what someone might do with a thing. It completely misunderstands what is going on here.

Per Bylund:

And it completely… In a sense it handicaps and undermines the position of any entrepreneur that whatever someone produces, can be used for something terrible, potentially, and something beautiful as well. But whatever the consumer chooses to do with it, it’s out of your control. So you can only try to make it valuable for a consumer, but you can’t really change the consumer’s behavior with the thing, how they use it, and so forth.

Per Bylund:

So I think producers make this error too, not only policymakers, but trying to steer users to use products in a certain way. An example of this would be Apple, for instance, where very often in Apple products, you can use it in one way, but you can’t really change it a whole lot. So unless you use the computer or the tablet, or what have you, the way that Steve Jobs intended and thought was a good way of using it, it’s kind of be a mess trying to use it.

Per Bylund:

And that sort of steering, it has the benefit of simplifying the product, and maybe simplifying the message. But it can also reduce the value that the consumer gets out of it and you can even make the value pretty much zero.

Mark Packard:

I was talking to my parents just the other day about WD-40 and all the things that WD-40 can do. And you know the story of WD-40 is that it was designed for aeronautical equipment, it was to prevent rust on aeronautical machines. But it is a huge product and a huge success because some of those employees took it home and started using it in different ways that it wasn’t originally intended for.

Mark Packard:

And yeah, let your consumers explore and try things with your product and see what they come up with because they can come up potentially with much more valuable uses for what you think it should do than what you think it should do. So, that’s a good point Per.

Hunter Hastings:

It’s the essence of what Professor [Kihani 00:30:44] called a couple of weeks ago, generativity, if you are unfiltered in what you let the consumer do, you’ll be unconstrained in the innovation that comes out the other side. So there’s a exponential potential there.

Hunter Hastings:

So let’s go back to what the entrepreneur can do, they can initiate a value proposition, “Hey, here’s something that I think will serve as the means to you, Mr. and Mrs. Consumer to fulfill your want.” And the wants today and wants tomorrow because of production taking time. And then they can monitor the consumers value experience and get some feedback from that, is that how we define what the entrepreneur can do?

Per Bylund:

Sure, why not? I mean, in a sense, they have to forecast or predict or imagine what could be of value to consumers and provide them with the means. And then seek whatever means of feedback there are in order to learn and just like we talked about, with WD-40, is a great example, that sometimes consumers use it in a much, much more valuable way than you had anticipated. Well, then it makes sense for you to follow up and try to figure out how they’re using it. And you can learn about your product’s actual value, by having a close relationship with the consumer.

Per Bylund:

So it’s not about selling something and then just turning your back and moving on. So any product in a sense, you can learn about the consumer experience. And you can have a relationship with consumers. And thereby realize how you can make the experience more valuable for consumers, maybe you can make a small tweak here and there. And that would facilitate more value for your existing customers or maybe you can make it valuable to a whole new range of customers.

Per Bylund:

I think it’s a little strange to assume that the entrepreneur can figure all this out to begin with. So when we talked about before that you should set place the value first and then the values determines the price that you might be able to charge for the product. And then your role as the entrepreneur is to choose the cost structure that can offer your profit given that your estimation of the price is correct.

Per Bylund:

Well, this goes beyond placing the sale that you can learn and you can continue to develop the product using the consumer’s experience and learning from the consumer how your product is actually valuable. And thereby you can improve your chances.

Per Bylund:

So I think a lot of modern companies recently anyway have had sort of adopted this model without, I guess, knowing exactly why. I mean they probably don’t have a value theory that they’re following. But having like panels of customers, providing feedback and looking at online reviews and things like that, in order to learn more. What did we do, right? What did we do wrong? Where’s the value add in a sense to this experience of our product?

Per Bylund:

And how can we help the consumer realize more value in using and experiencing what we have to offer? And there’s of course a lot you can learn. So you have to be open for that. And especially if you have a new product, it’s not easy to figure out exactly how people might use the product.

Hunter Hastings:

As we try to compose what we’re calling the Austrian business model, I think of it as three V’s and we’ve just covered I think the third one. So I call them value understanding, that’s what you two have been talking about all day, understanding what value is, value facilitation we’ve discussed that in depth. And the third term which might not be the right word, but is the right ideas, value agility, I.E. the agility to monitor the experience, take the feedback, make sure adjustments, take it back, see what happens next, continuous change and improvement. So I’m going to call that value agility.

Mark Packard:

Well, that’s also the on the entrepreneur side. The agility is on the entrepreneur side. But what you’re looking at is really an enhancement of the value experience for the consumer. So you have to be agile to respond to those things, but also to sort of suck in that information that might or might not be available.

Hunter Hastings:

Yep. The three V’s is a business model for the entrepreneurs, hopefully, as we perfect it. So another phrase you used in the paper, I think, Mark we’ll ask you this is that in all of this, the entrepreneur can never know. Never know what the value outcome will be. So just take us there, how does the entrepreneur act in that situation?

Mark Packard:

Yeah, Per was kind of talking about this. But when you think about it in this way that we’ve been discussing, the uncertainties and the difficulties of business become a lot more apparent, and you start to see how business isn’t just production and sales, it’s really about providing consumers with the best means to achieve the best experiences.

Mark Packard:

But again, everyone is different, and their value experiences must be unique. Because we’re also different, and we experience things differently. And this means that consumers will, over their lives, end up with very different value learning processes and conclusions and that means different preferences.

Mark Packard:

And so even if you could know for sure that your product would be subjectively beneficial to someone, it doesn’t really matter what you think, it matters what they think. And so you can’t ever know, what the value outcome will be. But you’re you’re doing the best you can with this uncertain future, with what you have, and you’re making your product as beneficial as it can be. And I’m doing some work on kind of these narratives, we’re painting a picture, we’re telling a story that helps consumers understand how what we’re doing, what I’m doing as an entrepreneur, would help you. And that’s about the best we can do.

Hunter Hastings:

So in the paper, you find another fascinating and important route for pursuing this idea of subjective value and entrepreneurship, and that is the entrepreneurs choice itself to be an entrepreneur, to act entrepreneurially. And you say that they’re not looking for dollars and cents in profit exclusively, there are non monetary rewards and satisfactions from facilitating the satisfactions of others. So I think Per maybe that’s developing a little bit more what Mark said, but take us there, the entrepreneurial choice and it’s subjectivity.

Per Bylund:

Sure. It’s really the same value theory that we’re saying that well, value is the experience you get from something, which obviously is not the dollars and cents that you get as profits, because your experience of that is something else, either, it could be the prestige of becoming rich, or it could be the prestige of being an entrepreneur, but it can also be the getting the means to consume something for yourself. Or it could be just simply being your own boss, or it could be all of these at the same time.

Per Bylund:

So the question for the entrepreneurs is really, why am I doing this, which is not necessarily even related to profit. Obviously, you would need to cover your costs and breakeven in order to continue running the business unless you’re Bill Gates or something. But other than that, I mean, why are you doing it. Most entrepreneurs are probably not in business for just reaping in cash and getting rich. I mean, the data shows pretty clearly that starting a business, it’s not a super way to get rich because entrepreneurs they typically make a little less as entrepreneurs than they make as employees, if you can compare the situations.

Per Bylund:

So it’s the same situation as for the consumer, but the value that you get of something is the experience and how you treasure and how the experience satisfies whatever wants you might have. So it’s wrong to as we often do study entrepreneurship in terms of the profits they make and thinking in terms of just the dollars and cents that you get in and that you sort of put in your own pocket.

Per Bylund:

Because that’s probably not what drives the entrepreneur just like it’s not what drives the consumer, whereas we think it’s pretty obvious for the consumer because the consumer pays cash in order to get the experience. But I mean, the entrepreneur does the same thing. It really is a subjective value world. And the analysis of it should then be subjective value analysis as well.

Hunter Hastings:

So in the paper, I’ve got some language here that I need you to unpack for us, you describe that entrepreneurship as a choice. It’s a contingent voluntary action of goal driven actors. I think I can translate that. And then Mark, you say the entrepreneurs uncertainty is not epistemic, which I take to mean knowledge constraints, which we’ve talked about a lot on this podcast. It’s aleatory if I pronounced that right, it’s randomness. So can you explain those two terms about uncertainty for our listeners in business language? How do I deal with aleatory uncertainty?

Mark Packard:

Yeah, I pronounce it aleatory, but I’m not quite sure what the right… It’s a Latin term. But the difference between what we call epistemic uncertainty versus aleatory uncertainty is epistemic uncertainties are ignorance based, they are things that you can know if you collect enough information. If I toss a die, there’s a one in six chance it’s going to come up a six.

Mark Packard:

But if I knew exactly how that die was cast and all the factors and stuff, it is possible for me to predict exactly what face that, that die is going to land face up. But there are other types of uncertainties that there is just indeterminate, it’s not random, it’s not even happened yet. Right? It hasn’t been determined, like other people’s choices.

Mark Packard:

A lot of things happen based on what other people choose to do. And they haven’t made those choices yet. So we can’t predict those future outcomes, we are waiting for people, including ourselves to make those choices. And so the outcome in that sense is just inherently unpredictable. Doesn’t matter how much data we collect. And so I get a little frustrated when B-schools and just industry experts talk about the promise of say big data, and artificial intelligence in predicting consumers and all this stuff.

Mark Packard:

Because consumers are people, they’re not going to be… They’re not automatons, they’re not computers, they’re not predictable in that sense. We don’t know what people will value in the future. We have to predict it as entrepreneurs, as business people, we have to predict it. But we can’t predict just by collecting more market data. Market research is important. We need to understand our customers and consumers.

Mark Packard:

But we can’t kind of jump in assuming this conclusion is right, we understand our consumers. And so this is going to work, we have to accept the fact that people are unpredictable, that they can change their minds, that they can surprise us. And going in with that mindset allows us to be more adaptive, more agile, as you were saying, and adapt to what they find and what they discover over time. And we can learn from them as we learn ourselves, and that makes this learning process both two-sided. The consumers are learning and we are learning with them.

Hunter Hastings:

In fact, that’s a beautiful phrase that you two had in the paper, you say entrepreneurship is the two-sided navigation of radical value uncertainty. So both sides have radical value uncertainty. In the never ending quest towards higher value states. So that gave me a good feel for the dynamics of it. And it’s a new definition of what entrepreneurs do.

Hunter Hastings:

And if I can pick up on another phrase and Per maybe you can take as long as… It’s a mental journey or process. A series of imaginings, judgments and learning over time. So tell us about that. It’s a journey.

Per Bylund:

Well, it truly is a journey, and in a sense it’s a learning process where you’re trying to figure out and you’re responding to whatever feedback and whatever information that you might come across along the way. The problem of course, is that everything requires your interpretation and your imagination of what it might mean. It’s definitely not as easy as simply looking at statistics and then picking whatever is the most significant variable or something like that.

Per Bylund:

Entrepreneurship is nothing like that. And it’s funny that Mark mentioned that such statistical and big data analysis. I wrote an article before, I think it was on mises.org. Commenting on the Bing search engine, where they had an attempt to using big data to predict who would win in sports games, football and basketball, and ice hockey and what have you.

Per Bylund:

And I looked at some of those results. And it turns out that pretty much consistently they were two thirds right. And then they were talking about a sport where you know a lot of statistics about the players, you know exactly the rules, you know how much time they have, you know exactly their positions, you know the rules, they are pretty obvious, they’re explicit to all the rules. So, it doesn’t actually give you a lot of space for unknowns, because everything is already structured, and it’s clear, still big data could only predict two thirds of the actual outcomes.

Per Bylund:

Even given the historic data on say if the team is having a good streak, or whatever, even with this information, they still couldn’t get it right. And then, of course, trying to use big data to predict what will people value in the future, I mean that’s impossible, what you can do is potentially exclude things that are probably not relevant or exclude ways or routes that are not going to be very helpful.

Per Bylund:

But you still have to base it in your own imagination of what will be the case of your imagination of how consumers will use your product and how they will cherish the experience that they get, sort of empathize with them, placing yourself in their shoes. And of course, learn along the way and learning along the way that journey as we said before, it doesn’t end with placing the sale, it continues, because that’s where you can start to learn about your product, and how consumers actually experience the product when they’re using it.

Hunter Hastings:

So let me wrap up there with a question that’s pertinent for our economics or business project. And you’ve given everything that you’ve just explained and elucidated so much. We’re trying to facilitate more successful entrepreneurship, meaning you can better help consumers to get satisfaction, to experience value, we think of it as a GPS to use your journey metaphor, which is given where we want to go more satisfied consumers.

Hunter Hastings:

Here’s where I am right now. And here are some things you can do to make that journey more accurate and more successful. So is that doable? And the way you’ve just described it? Can we facilitate more successful entrepreneurship? Better two-sided navigation of the process?

Per Bylund:

Yeah, of course. I mean, what we’re talking about here is really facilitating the facilitators of value. And I think, getting your mind in the right place, thinking about these things in the right way. That’s the place to start. And unfortunately, not only do many entrepreneurs, not realize these things, and of course, they don’t have to read scholarly papers or anything like that, but they need to have a proper thinking about how the world works and what they’re actually offering that they’re not selling a valuable product, they’re offering a product that can facilitate value for consumers, which is different.

Per Bylund:

And unfortunately, many business schools are teaching this in the wrong way and using objectivist language and we had a podcast before when we talked about how they’re using analogies from military conquest and things like that. And that’s terrible, that’s not only misunderstanding value, that’s completely flipping everything upside down and putting it on their head because it’s not the case that you’re conquering a market and you’re subduing the consumer, you’re doing exactly the other way around.

Per Bylund:

You’re trying to figure out how to serve them the best way possible. That doesn’t make you a king or a conqueror. It makes you a servant in a sense, and you benefit and serve yourself by serving others. The consumer really is sovereign in the marketplace.

Hunter Hastings:

Mark I’m going to leave you with the last word on facilitating entrepreneurship.

Mark Packard:

I totally agree with Per. I mean, I think one of the tasks or goals of the Economics For Business program and project is to get business people and entrepreneurs to understand economics in a fundamental way. And as Per was saying, the current paradigm in social science, including management and entrepreneurship researches is objectivist view, where you just kind of look at these various factors A, B, and C and see what kind of effects, statistical effect it has on D.

Mark Packard:

And based on that analysis, they say, “You should do A or C, and that’s just not very helpful if you’re an entrepreneur, because you don’t really understand the mechanisms of why. But Austrian economics, this deep understanding of how economics actually works, gives us that why and that helps you to navigate the uncertainties, the dynamics of economic change and process. And that’ll help you a whole lot moving forward.

Hunter Hastings:

Well, I want to thank you both for the incredible work that you do throughout your research and your theorizing, this paper is a particular breakthrough I think. And it’s certainly facilitated a good experience for me, and I’ll do what I can working with you too and everybody else at the Mises Institute to get more and more people to appreciate the implications of it, because I think they’re colossal.

Hunter Hastings:

So thank you both for today. And thank you for the ongoing work and we’ll continue to try to make this as useful as possible for everybody out there who’s listening. Thank you.

Mark Packard:

Thanks Hunter.

Per Bylund:

Thank you.

When Businesses Re-Think Value Using A Subjectivist Approach, Many Beneficial Consequences Follow.

When businesses take the time and analytical effort to think about value and to define it from the customer’s perspective, they will realize the opportunity to re-shape their business models and manage their business in new ways.

Here is a quote from a respected business source, highly ranked on the Google search page:

What’s the purpose of your business? Some would define it as profitability, cash flow, security, or freedom. The purpose of a business is to serve the values of you as the owner. Its purpose is value creation for the owner.

And, in a 2020 post, respected consultancy McKinsey demanded a clear definition of value and then failed to give it.

Particularly at this time of reflection on the virtues and vices of capitalism, we believe it’s critical that managers and board directors have a clear understanding of what value creation means. For today’s value-minded executives, creating value cannot be limited to simply maximizing today’s share price. Rather, the evidence points to a better objective: maximizing a company’s value to its shareholders, now and in the future.

These quotes are a tiny slice of what’s out there: multiple definitions or approximations or circumlocutions for value.

Value is not a thing. It can’t be created or maximized. Value is a personal feeling of satisfaction experienced by an individual, in their own mind. It’s positive, because it occurs when an experience is preferable to an alternative or to an expectation or to what went before. It can be expressed or communicated by the individual, but it can’t be measured.

The purpose of a business is not “value creation for the owner” but the facilitation of value for the customer. That word facilitation is important. When a customer senses value potential – the possibility that a consumption experience might be satisfying and fulfilling to them – they may seize it. They buy, they use. They create value. There is no value without consumption. Value is in the customer’s domain. They are the ones who discover new values; they are the ones who innovate, because without them there is no innovation. Innovation is an experience of the customer.

The business is the facilitator for the customer.  This role is a major change for many businesses compared to the way they currently think about themselves. There are numerous significant implications.

Businesses and customers co-navigate the uncertain seas of value.

In their recently published paper, Subjective Value In Entrepreneurship, Professors Per Bylund and Mark Packard point to the value uncertainty that both consumers and businesses experience. Consumers know what problems they are trying to solve or what dissatisfactions they are trying to overcome, but they can’t know whether the business’s offering is going to deliver the satisfaction they are looking for. Will this suit make the right impression in the office? Will this spaghetti and meatballs remind me of the time I spent in Rome? Will this car deliver 35 mpg even though I use it mostly just to ferry the kids back and forth to school? Consumers can never be sure that they’ll have the experience they want.

It’s the same for businesses. It’s impossible to know how the consumer will feel, and impossible to know whether the specific combination of features and benefits and website design and advertising and customer service will precisely meet one customer’s requirements, and to know how much different the next customer’s requirements will be.

The customer and the business are both searching for the perfect intersection of wants and solutions. Neither one of them can know exactly where that intersection lies. This makes them equal partners in value in a way that businesses have not typically treated customers in the past. Value is created by customers; businesses facilitate. Innovation is actualized by customers; businesses bring it to market. Discovery of new uses and applications is the task of the customers; businesses observe and adapt.

Businesses must grant customers a new co-equal role.

A business or brand is just one part of a value facilitation network.

When the consumer experiences value, it’s experienced within a consumption experience system. Tide laundry detergent is consumed as a combination of chemicals designed to get clothes white and bright and smelling nice. It’s used in a washing machine, of which there are numerous brands and types and sizes the world over, connected to all kinds of water systems with many kinds of water (hard, soft, mineral, etc.). It’s used on all kinds of fabrics, at many different temperatures and altitudes. It may be used in conjunction with other additives such as bleach or fabric softener. The washed clothes may be to wear at school or on the sports field, or to the office or to a party. They may be worn in all kinds of weather. The washing detergent is bought on a trip to the supermarket along with other groceries, and must be transported from the store to the laundry room.

The consumer has a system. They have a lot of household chores and they allocate them to certain times of the day or week and they have certain ways of completing those chores. They experience value within this system. They orchestrate all of their providers to make the system work for them.

It’s important for value facilitation for businesses to see themselves as a node and a set of connections within a value facilitation network – a value net. What is the best way to fit in to make the consumers’ system work best for them, on their terms? How do different consumers’ systems vary? How does that affect the business’s “fit”? How can a business fit more consumer systems? How can a business earn greater significance in a consumer’s system by helping them orchestrate, or by helping them with multiple jobs rather than one?

Business is a responder rather than an initiator.

A major change in business mindset is called for when value is redefined as subjective, and as a consumer experience. Our traditional mythology of business is as the proactive initiator of relationships with customers, the discoverer of new techniques, the innovator, the advertiser pushing new solutions to a grateful crowd of takers. The “great men and women” theory of business as led by extraordinary visionaries fits this mold of thinking. The Steve Jobs attitude of “people don’t know what they want until I design it for them and present it” is similarly reflective of the accepted imagery that business leads and people follow.

In reality, business is the follower, or at least the responder. The demand for innovation and better service and better experiences comes from consumers. They are the ones who cultivate the realization that not everything works as well as it should, that the levels of service that are offered are not good enough, that experiences could be better. They send out signals to this effect via what we call dissatisfaction or unease with the status quo.

The effective businesses are those that respond best to these signals, the ones with the best antennae and with the best interpretation of signals that may be coded in a different language than businesses are used to. These businesses are especially tightly coupled to their customers. They are skillful in exercising empathy, and in imagining experiences from the consumer’s perspective. They exhibit better understanding.

The consumer signals indicate there is potential for new value. The task of business is to see this potential and fashion a responsive offer that can trigger its realization. It’s a humble approach to business, an assembly of experiments to see if they can get to the right response, rather than a magisterial strategy or business plan for success.

Here’s a simple example. A recent Ford F150 truck re-design features an interior with a flat surface work “desk” for using a laptop, and an exterior power supply for plugging in all kinds of electrical equipment (the ad shows a DJ hauling and plugging in his gear). Did Ford independently initiate these ideas? No. They responded in an agile way to the practices of truck owners, some of whom spend hours a day working in their cabs, including computer work, and some of whom are entrepreneurial DJ’s hauling their gear to where the gigs are and asserting their independence from other people’s power sources. The consumer acts, the business responds. That’s the new subjective value generation method.

Subjective value thinking puts business in a different place in society.

When the purpose of business is to facilitate valued experiences for customers, to help them achieve betterment in their lives, and to find meaning and purpose in the successful pursuit of that betterment, we can view businesses in a new light. We can discard the cynical expectations of exploitation of unsuspecting customers instilled in us by our Marxism-tinged educators, and embrace the understanding of businesspeople devoted to the betterment of customers, and thereby the betterment of society. Businesses are sustained by the entrepreneurial ethic of serving others in order to help themselves. This ethic is the foundation of economic society, and subjective value thinking highlights it in the most appropriate way.

Quantum Economics, Potential, And The 4V’s Business Model.

To get your head around quantum mechanics, it’s necessary to be able to think about a space that’s between reality (called spacetime in the language of the science) and imagination, something that doesn’t exist. This half-way house, this in-between, is not unreal. But it can’t be observed or verified. Some of its inhabitants will become real and verifiable and some won’t, never to be observed at all. A way to think about this in-between is as potential. Potential is sometimes realized, and sometimes it isn’t.

In her book Understanding Our Unseen Reality, Ruth E. Kastner explains how potential can be realized in quantumland. It takes the form of a transactional process, in which a quantum object that she calls an emitter sends out an offer wave. Under certain conditions, another quantum object, which she calls an absorber, can receive the offer wave and send a confirmation wave in return. If the confirmation is a mirror image of the offer, the two objects have formed an incipient transaction. If there is only one offer and only one matching confirmation that is an exact mirror image, the incipient transaction becomes actualized and real. It becomes, in Kastner’s words, “A brick’, an observable, verifiable event in spacetime. (pp 48-53)

I am quite sure I have oversimplified quantum theory. However, it’s in the good cause of making an analogy that is useful for real-world practicing entrepreneurs and businesses.

Austrian economics is quantum economics. Quantum mechanics is the study of behavior and properties and interactions of the smallest units of energy in the universe.  One of its revelations is that “the rules are different” at this scale. The rules of classical physics do not apply. Austrian economics is the study of the smallest unit of energy in the economic system, the individual. The term that is used in economic science is methodological individualism: the study of the behaviors and properties and interactions of individual people and how they propagate into processes like value creation, and economic growth, and into structures like firms. (Here’s a white paper that explains in detail.)

An example of an emergent process is the Austrian Business Model, a framework for profit-making operations for businesses. The essence of the Austrian Business Model, the engine if you will, is the core value generation process we call 4V’s. The 4V’s represent a rolling, recursive, repeating value process for firms to successfully bring new innovation to the market. The 4V’s are Value Potential, Value Facilitation, Value Capture, and Value Agility.

In quadrant V1, Value Potential, is in quantumland. It’s not yet real, but it can be. Think of it as the space where the consumer is sending out offer waves, just like a quantum object. These offer waves are a little hard to process. The consumer expresses dissatisfaction, or unease with the current state of their consumption experience. Things could be better. The wine could be more to their taste, or it could be less expensive. They like the room afforded by their SUV but they’re a bit unsure whether they can put up with the mpg levels. They like going to restaurants but it might be nicer if the restaurant came to them. Maybe they feel they’re not getting all the possible benefits that they could from the internet. Or Netflix. Why is zoom so hard to use? Why does my bank treat me with such disdain? Why can’t I eat as much chocolate as I would like? Why is healthcare so expensive? I’d like to earn a degree, but I’m not sure if it’s worth the 4-year commitment or the money. Why is the CFA exam so hard? Why is dentistry so painful? Is my dog enjoying its food? I hate having acne. I have a headache. Sometimes, I feel a bit lonely.

Consumer sentiments such as these are offer waves. They’re the signal that precedes an incipient transaction. If they are important enough to the individual, and if they’re important to enough individuals, they represent value potential. For example, unease about the time commitment and cost of acquiring a traditional 4 year degree could be an offer wave that, when absorbed and confirmed, becomes educational innovation, the formation of online for-profit degree courses, and ultimately Coursera and Masterclass. Concern about the palatability of dogfood could become The Farmer’s Dog, or A Pup Above or one of many more entrepreneurial initiatives. Feeling lonely sparks the $3 billion online dating industry, or Meetup.

None of these businesses are real in their pre-existence as consumer unease. They are potential. Every firm, every business unit, every industry, every innovation begins as a quantum object we call consumer dissatisfaction. Every firm needs to begin with a stash of value potential. Every firm needs to be able to exercise empathy to detect the signals, understand the feelings of the emitters, the dissatisfied consumers, and translate them into commercial possibilities. These firms need the creative imagination and the resourcefulness to devise and run multiple probes into these possibilities, a portfolio of experiments in activating potential. Some will work in generating a confirmation signal that the consumer determines is the mirror image to their unease. Many experiments won’t work. The process is probabilistic. It might be possible to improve the probabilities in your firm’s favor by running more experiments or becoming better at absorbing offer waves. Or it might not.

Whatever the case, identifying and accumulating value potential is a necessary capability of every successful firm. Without it, there is no success. It requires deep, intimate understanding of the consumers, and a commitment to interpreting their offer waves. It requires the humility to know that it’s hard to perfect the process, and that there will be a lot of misinterpretations and errors.

 

 

Value Is A Process – the Essence Of Entrepreneurship.

 

What is the value of a pizza?

If you asked a standard economist, they might—thinking themself quite clever—ask in return, “well, what would you pay for one?” Now, that’s a fine response as far as it goes. But in neoclassical economic theory, that’s not as far as they seem to think.

Standard economists will readily admit that value is subjective, but what they mean by that is not what subjectivists mean by it. See, in philosophy of science, social science divides down strict lines of ‘objectivism’ and ‘subjectivism.’ The objectivist—also realist or positivist (these are distinct terms, but align in the objectivist paradigm)—sees the social world as comprising real things, objective phenomena that are more-or-less stable and causally deterministic and, thus able to be studied as such. In other words, social reality is in principle no different from physical reality, and we can study it the same way. Yes, it’s true that there’s tons of noise and randomness when studying social phenomena, which require statistical methods to find causal relationships, but the same is true of certain natural sciences too, such as climate science (not exactly a ringing endorsement in many libertarian circles).

Applying objectivist philosophy to the value concept, the assumption is that value is real and objective. A pizza has value—it’s there in the pizza. But what’s interesting about this value—which has been defined as ‘marginal utility’ since 1871—is that it’s different for everyone. Utility, of course, is usefulness—how much benefit I would get from the pizza. But utility is different for everyone—we have different tastes, dietary needs, and so forth. What this means is the objectivist economist—which is most of them—understands value as objective but idiosyncratic. ‘Idiosyncratic’ is synonymous with ‘subjective’ if you’re an objectivist.

But philosophical subjectivism, as the Austrian School espouses, sees the social realm very differently. There is no “social reality,” strictly speaking. A job, a marriage, a personality, a reputation—these don’t really exist. ‘Reality’ references the physical realm—what the natural sciences study. The company Google is just a concept—a figment of our imagination. There are real people that ‘belong’ to the Google organization; there are physical structures that comprise Google’s offices (the Googleplex); Google even creates some physical products. But the organization ‘Google’ is just a concept that Sergey Brin and Larry Page conjured and was granted ‘legal status’ (which is just getting another imaginary organization’s imaginary stamp of approval), which solidified the concept ‘Google’ as a ‘legal entity’ into the minds of people that is—for most intents and purposes—for us as if Google were a real ‘thing’. Lots of social constructions are like that: marriages, job titles, fictional characters like Harry Potter, etc. Many more are flimsier: relationships, reputations, scientific knowledge, etc. These have little or no institutional status, and so evolve with the whims of society. Studying social phenomena from this subjectivist perspective, then entails understanding what people think about those phenomena, how they understand them and why.

Value, from a philosophically subjectivist viewpoint, is very different from the objectivist concept of value as objective, idiosyncratic usefulness. Instead, subjective value occurs in the mind.

There are two key aspects of a subjective value concept, which we can distinguish by the form of word (i.e. part of speech) that it takes. As a verb, value (i.e. to value) is a prediction of or reflection on a benefit (depending on the context of the valuing). To say “I value the pizza” means either ‘I expect to benefit from the pizza’ or ‘after eating the pizza, I recognize benefit gained from it.’ As a noun, value is a conscious experience of benefit. This means that there is no value until it’s been experienced. When you understand the experiential nature of value, then we can’t equate predictions of value (value as a verb) with real value (value as a noun).

So when we ask, again, what is the value of a pizza, the right retort, from a subjectivist perspective is not “what would you pay for one,” but “how much benefit did you experience from it?”

To show how and why this matters, consider an example. Let’s say you’re hungry and are in the mood for pizza, enough so that you’re willing to pay up to $20 for one. So you ordered a pizza from Bylund Pizzeria around the corner for $10, who makes the pizza at a cost of $5. You have it delivered and leave $2 for tip, bringing your total outlay to $12.

In the traditional economic analysis, the example stops here. You have all the information that you need to calculate total economic value created. Economists estimate value as willingness-to-pay or WTP—how much you were willing to spend to satisfy your want, $20 in this case. The price P ($10+2) and cost C ($5) are the other two relevant factors. Total economic value creation is calculated as WTP-C, the total new consumer value minus the cost in resources and labor to produce it: $20 – $5 = $15.

But the subjectivist framework doesn’t stop here. Again, value hasn’t emerged yet, since it hasn’t yet been experienced. So let’s keep going. You sit down to the table, open up the pizza box and find a beautiful pizza with a fat cockroach crawling on top of it. You slam the box shut and run it outside to the nearest dumpster.

So let’s redo our economic value analysis now. Value isn’t WTP, it’s the benefit experienced. What was the total value achieved from the pizza? Zero. Probably even negative—you could say that you experienced harm rather than benefit, both in the trauma of the fright and in the fact that now dinner is going to be late. Let’s plug in zero: $0 – $5 = -$5. In other words, economic value was destroyed in the transaction—$5 of resource were expended for absolutely no benefit.

Life is an endless value journey—action and experience are continuous from birth to death. This journey is a learning process. What valuation should we assign goods, services, and activities? How should we prioritize our activities and expenditures to maximize our value experiences and well-being?

The principle of diminishing marginal utility—that consumption of a second unit of a good is not as valuable as the first—is widely known and accepted. But what’s not widely admitted, although we know it intuitively, is that the needs that we must satisfy to maximize well-being are dynamic. We keep getting hungry over and over again. One might break an arm, birth a child, pick up a new hobby, or start a new diet—changes that alter the things we value most. Similarly, changes are going on around us that have similar effects—changes in the weather, new innovations, pandemics, and politics.

Value is a process—one that we’re not just constantly engaged in but also constantly monitoring and learning from. It is in this process—in advancing it forward—that we find the essence of entrepreneurship.