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

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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.

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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.

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This article is a summation of arguments made in a recent academic publication in Small Business Economics Journal, entitled “Subjective Value and Entrepreneurship” by Drs. Per L. Bylund and Mark D. Packard.

 

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.

108. Per Bylund and Mark Packard: Radically Reshaping Business Thinking via Subjective Value

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In a recently published paper titled “Subjective Value In Entrepreneurship,” Professors Bylund and Packard apply the principle of subjective value to generate significant new avenues of thinking for entrepreneurial businesses to pursue.

Download The Episode Resource10 Radical Shifts in Business Thinking – Download

Key Takeaways & Actionable Insights

Re-think value.

Business schools teach value creation. But their definition of value is faulty, based on a profound misunderstanding. Value is not objective and measurable, as in the business school paradigm of generating more of it. Value is subjectively understood and experienced. It’s a motivation for action (people have a desire to achieve experiences that they value) but it’s immeasurable. It is emergent from complex social systems and patterns of interaction between individuals, not something “created” by businesses.

Re-think the economics of value and value creation.

Value is created by consumers via their experiences. Producers are servants to consumers and their preferences; producers seek to convince consumers to allow them to provide for their wants. Since consumers have alternative courses of action, producers must scrutinize and revise their plans continuously to conform with consumers’ changing choices. This is consumer sovereignty, an essential element of a value-centric business model.

Re-think the role of the consumer in the economic system.

Consumers facilitate their own consumption. They pursue their own individual well-being, including by expressing their wants and needs to producers. The demanding of solutions is the task of the consumer, as is the choosing between available and expected alternatives. They experience value uncertainty (their preferences may end up dissatisfied) and they actively assess and learn about entrepreneurially produced alternatives that are available. They learn cumulatively as they amass consumer experience. Thus the role of value innovation and solution discovery is, actually, the consumer’s and not the producer’s. Innovations are generated by consumers in their never-ending pursuit of higher-valued satisfactions. Consumers’ own imagination and understanding shape their subjective experience.

Re-think the role of the firm.

The producer’s role can be divided into value proposition creation, value facilitation and value capture. Producers respond to consumers’ dissatisfactions with the status quo by devising and assembling new value propositions – features and benefits responsive to consumer wants, aiming to generate feelings of well-being and satisfaction. Producers become partners in the consumer’s value learning process, providing a comparatively better offering than others, so that the consumer prefers it.

The consumer generates a willingness-to-pay, when they feel that the use value of an entrepreneurial offering exceeds the price they are asked to pay. The offering now has exchange value to the consumer. This money magnitude does not indicate the actual subjective value to the parties, but it does generate profit (if it covers production costs) that can be used in the market.

Re-think business models.

A business model captures the fundamental idea of consumers and innovative businesses jointly navigating a shared experience of value uncertainty, in a never-ending quest for higher value states from which they can both profit. This co-navigation process must be built in to business model design, and business model innovation consists of new co-navigation pathways and new ways of sharing. For example, the concept of generative business models we explored in E4B episode #104 gives a greater role in co-navigation to consumers as a way of generating new value.

Management without measurement.

Subjective value represents a challenge to theories of business that adopt a “make the numbers” approach to performance. When value is immeasurable, business processes must be assessed via variables such as the quality of understanding of the consumer and their preferences, the quality and accuracy of empathic diagnosis, and the trust generated with consumers to adopt the business as a co-navigator of value uncertainty. It is possible that survey data can be helpful. More fundamentally, Austrian economics can provide a set of principles for management without measurement.

One approach is qualitative models, which can be designed and subsequently calibrated with marketplace activity. One form of such models is simulation, using agents that represent the emotions and uncertainty felt by consumers in markets. This is a direction that technologically-augmented entrepreneurship may take.

Re-think output metrics.

Similarly, in a world of subjective value and qualitative assessment, concepts such as KPI’s (key performance indicators) can’t realistically be applied. Concepts such as profit and free cash flow continue to apply, given full recognition that they are reflections of accounting conventions, because they indicate the sustainability of the firm and its business model. But new output metrics for subjectively-experienced consumer value and for satisfaction and well-being remain to be invented.

Re-think organizational design.

Subjective value applies not only to consumer activities but equally to entrepreneurial activities. Professors Bylund and Packard present entrepreneurship as an individual journey, one that is primarily mental. The journey is a series of imaginations, judgments and learning over time regarding what problems to solve, what resources are available, what those resources can do, what can and should be done with them (in combination), how to do it and why (i.e. what are the goals and ends the prospective entrepreneur aims for).

Entrepreneurship is chosen. In an entrepreneurial business, many individuals are engaged in — choose — entrepreneurship. Much of their motivation lies in unleashing their imagination, processing their own learning, and finding purpose and meaning. Organizational design becomes the search for the best structures to free the individual to make entrepreneurial choices, to apply their individual imagination and explore the co-navigation of uncertainty with consumers. The firms that do this best will be the ones that succeed in value facilitation and value capture.

Re-think motivation and incentives.

Why do individuals choose entrepreneurship? As Professors Bylund and Packard point out, money magnitudes do not express much of entrepreneurial motivation. Subjective values of purpose, meaning, achievement, personal fulfillment and others are primary. These can not be captured in salaries, bonuses, awards, promotions and titles. The firms that master subjectivist motivations will be able to attract the best talent.

Re-think the social contribution of business.

Entrepreneurial capitalism is under fire in America today. Profit is seen as exploitative, and employment is often viewed as restrictive and oppressive. The ends of business are sometimes portrayed as conflicting with those of society.

An understanding of subjective value would generate a perspective of business as the facilitator of satisfaction and well-being in society. Business creates jobs and incomes for consumers, enabling them to facilitate their own value both in the form of psychic reward in their work and user satisfaction in their consumption value experiences. Individuals, families and communities are all beneficiaries of this value generation.

Businesses provide consumers with continuously improved goods and services at ever-lower costs, providing the means for consumers to achieve their desired experiences and satisfactions. This provision of means is generated entirely in response to consumers’ expressed wants and preferences.

Contribution to societal well-being is therefore the sole end of entrepreneurial business.

Additional Resources

10 Radical Shifts in Business Thinking (PDF): Download Here

“Subjective Value In Entrepreneurship” by Mark Packard and Per Bylund (PDF): Download Here

“The Value Generation Business Model” (video): Watch Here

Corresponding PowerPoint (Download Here) and Keynote Slides (Download Here)

The Austrian Business Model (video): https://e4epod.com/model

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

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

Apple Podcasts, Google Play, Stitcher, Spotify

“Subjective Value In Entrepreneurship” by Mark Packard and Per Bylund (PDF): Mises.org/E4B_108_Article

“The Value Generation Business Model” (video): Mises.org/E4B_108_Video

Corresponding PowerPoint (Mises.org/E4B_108_PPT) and Keynote Slides (Mises.org/E4B_108_Key)

“The Austrian Business Model” (video): Mises.org/E4B_108_ABM

97. John Boles: How Austrian Is Your Business? Continuous Value Perception Monitoring is One Measure.

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With the development of the Austrian Business Paradigm and the Austrian Business Model, and tools such as the “Value Learning Process,” businesses of all kinds can utilize the deep insights of Austrian economics to further enhance how they facilitate value for their customers.

John Boles — an avid listener of the Economics for Entrepreneurs Podcast — provides an example of how he applies these insights at his accounting firm.

Download The Episode Resource Continuous Value Perception Monitoring Tool – Download

Key Takeaways & Actionable Insights

1) Improved customer understanding.

The Austrian business paradigm places the customer in first position. This contrasts with traditional business thinking that puts the firm or the product or service in first position and searches for ways (“strategies”) to sell or market that offering to a set of customers who are to be identified during the selling process.

The way to put the customer in first position is to make your top priority a deep and intimate understanding of the customer, demographically (who they are), functionally (what they do and how they do it) and emotionally (how they feel — about key issues and challenges, about vendors and service providers, about competition and every aspect of business).

The first question Austrian business practitioners ask themselves is: how deep and intimate is my customer knowledge, and can it be improved?

2) Calibrating the customer’s perception of value.

Value is a feeling that exists only in the mind of the customer. The entrepreneur’s task is to facilitate that feeling of value — ease the way for the customer to arrive at that happy state of mind. It’s imperative for entrepreneurs to try to feel what the customer feels — to sympathize with their perception of value, rather than to focus only what the firm is delivering. We must know what the customer is buying, not just what we are selling.

The tools to use are monitoring of customer behavior (what they do — for example, shopping around for alternatives — is more important than what they say); making sure you understand their rankings of features, attributes and benefits, that is, what’s most important to them; and conducting interviews about the value experience. Ask the question: is the customer’s perception of value experienced aligned with the firm’s perception of value delivered?

3) Are value adjustments indicated?

The Austrian view of the market as a process helps us think about continuous change. Customers are continuously interacting with other customers, competitors, ideas, new value propositions, environmental conditions, regulations and a plethora of marketplace changes. Consequently, their perceptions of value are in constant flux. It should not be a surprise that entrepreneurs need to make value adjustments. It may be necessary to change perceptions of absolute value (via an adjustment in the value proposition), of relative value (via an adjustment in comparison with alternative propositions), or of exchange value (via adjustment in pricing, bling terms, or discounts / rebates).

4) Communicating adjustments.

It’s easy to overlook a critical component of value adjustments: communication. The Austrian business model advocates frequent in-depth conversations with customers at every level. These conversations, while always two-way of course, can be primarily designed for outbound communication, describing the adjustments made, and why they were made and ensuring the customer understands the responsiveness of the firm; or for inbound data gathering, primarily listening in order to further increase understanding of the customer and their preferences.

Customer communication is a component of perceived value.

5) Ongoing evaluation.

The customer is always evaluating the service provider / vendor and their value proposition, through the lens of experience: did the value experience match the anticipated experience; and, if not, in what ways was it deficient? The service provider / vendor must also undertake continuous evaluation. Did the value adjustments succeed? Are more called for? What are the indicators of change?

Free Downloads & Extras From The Episode

Continuous Value Perception Monitoring + Adjustment (PDF): Get It Here

“The Austrian Business Model” (video): https://e4epod.com/model

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

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

Apple Podcasts, Google Play, Stitcher, Spotify

95. Martin Lünendonk: How To Make The Customer Your Boss

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Consumer sovereignty is a principle of Austrian economics. Here’s how entrepreneurs apply the principle in business, as told by Martin Lünendonk, co-founder of FounderJar.com, as well as Finance Club and Cleverism.com.

Download The Episode Resource How To Make The Customer Your Boss – Download

Key Takeaways & Actionable Insights

“There is only one boss. The customer. And he can fire everybody in the company, from the chairman on down, simply by spending his money somewhere else.” —Sam Walton

Though they are several decades old, these words by Walmart founder Sam Walton are still very relevant, especially in today’s highly competitive world.

This is particularly true for those trying to make money online. You are already in competition with hundreds, perhaps thousands of other businesses, and if you do not put your customers first, they can easily move to the competition. It’s as easy as tapping a few buttons on their smartphone.

Great business leaders understand that businesses exist for one sole purpose — to serve the needs of their customers. If you want your business to not only survive, but to thrive in this hyper-competitive world, it’s time you started treating your customers like the boss.

Below, let’s take a look at the steps you need to take to place your customers in their rightful seat — the boss’s seat.

1. Identify the Key Problems Customers Want To Get Solved

To effectively serve your customers, you need to first identify what key problems the customer is trying to solve.

Very often, entrepreneurs set out to solve problems they think the customer has, without trying to look at things from the customers’ point of view and confirm whether the customer has this problem, and whether it is a problem they are trying to solve.

For instance, Blackberry assumed that what its customers wanted was a laptop that could fit on the palm, so they focused on improving the physical keyboard.

Apple, on the other hand, realized that what customers actually wanted was a device that was amazingly easy to use, and when they introduced a device with a touch screen and no physical buttons, they took Blackberry out of business.

So, how do you identify the problems that customers are trying to solve? There are two ways to do this:

Listen To Your Customers

The easiest way to identify the problems your customers are trying to solve is to actually listen to them. They know what they are struggling with and why they need this problem solved.

If you listen to your customers, you are unlikely to find yourself in a situation where you are solving a problem no one cares about.

There are two main approaches you can take to listen to your customers and identify the problems they are trying to solve. Here are a few…

  • Interview your customers: Your first option is to get proactive and ask the customers directly. You can do this using surveys on your website, by getting on the phone and talking to customers, through focus groups, and so on.
  • Look at customer reviews: Your customer reviews present another great opportunity for you to learn about the problems your customers are trying to solve. Here, you should place more focus on the negative comments, since these are the ones that highlight customer needs that are not being met. However, even positive comments can give insights into customer problems that you’re solving effectively.

Listen To Your Salespeople

The second approach to identifying the problems customers are trying to solve is to listen to your salespeople.

Your salespeople are in direct contact with your customers, and they, therefore, have better insights into your customers’ thought processes.

They know the pain points that drive customers to purchase your products and services, they know the things that customers like or dislike about your products, they know the reasons that keep some customers from purchasing, and so on.

By administering surveys to your sales teams, you can gain insights that will help you figure out your customers’ key problems, which will in turn help you to serve them better.

When trying to gain insights about customer problems, either from the customers themselves or from your salespeople, it’s good to try to get to the root cause of the problem. Sometimes, what you think is the problem might not actually be the problem.

For instance, at one point, Disney was experiencing lots of criticism because visitors felt the queues for the rides were too long. At first glance, the problem seems obvious – visitors spending too much time waiting for their rides.

The solutions to this problem are obvious as well. To shorten the queues, Disney would either have to invest in more rides, or reduce the number of visitors getting into their parks. Both of these solutions would cost Disney millions.

Disney hired a group of designers to help them solve this problem. After interviews with Disney visitors, the designers realized that the problem wasn’t the long queues. The problem was that visitors were getting bored because they had nothing to do while waiting in the queue.

To solve the problem, they had Disney add themed music and videos that visitors could listen to and watch while waiting for their rides. By getting to the root cause of the problem, they were able to come up with an effective solution that saved Disney millions.

Similarly, do not take your customers’ feedback at face value. Try to identify what the root problem is before you start developing a solution.

2. Make Sure Your Offering Solves Those Customer Problems

Now that you have identified the problems that your customers are trying to solve, it’s time to come up with solutions to solve those problems.

The best way to ensure that the solution you are developing solves the actual problems your customers are struggling with is to involve your customers in the development process.

One approach is to develop a minimum viable product (MVP) of your solution and show it to a group of customers with the problem you are trying to solve. You then collect their feedback, and use insights to improve your next iteration and ensure that your final solution solves the customer problem in the most effective way.

Minimum Viable Product

SOURCE: Clevertap.com/blog/minimum-viable-product

For instance, when creating DropBox, founder Drew Houston didn’t want to spend months, perhaps years, working on a product that no one was interested in, so he started with an MVP.

Drew’s MVP was a simple 3-minute video demonstrating how his product was meant to work. He shared the video on Digg, an online community of technology early adopters.

After sharing his video, over 70,000 people joined the DropBox beta waiting list within a single night, which was enough validation that his product was solving the right problem.

Another way to involve customers in the development of your solution is to form a small community of beta testers and give them access to your solution during the development process.

This works even if you are developing a service-based product. For instance, if you are a digital marketing consultant, you could create a package — say a content marketing package — and test it among a small group of customers before you launch it in full scale.

The aim here is to have a group of actual customers continually testing the solution you are developing to make sure that it addresses their key concerns in the best possible manner for them.

This way, you don’t have to worry about spending months or years coming up with a solution to your customers’ problems, only to discover that it is not the kind of solution they were looking for.

Another way to ensure that what you are offering solves your customers’ actual problems is to conduct A/B tests. This basically involves creating two versions of your offering, giving two small groups of customers access to each version, and then tracking the results to identify the version that solves customers’ most effectively.

3. Track Customer Satisfaction

Ultimately, what matters is keeping your customers satisfied. If your boss is unsatisfied with your work, you can bet that you will be out of work soon.

Similarly, if your customers are unsatisfied with your business, they will fire you – by spending their money on your competitors.

Actually, while 96% of unhappy customers will not voice their dissatisfaction, 91% of them will never make another purchase from you. This is definitely something you don’t want.

To know whether your customers are happy, you need a way to track and measure customer satisfaction. Here are five of the most effective ways of measuring customer satisfaction:

Customer Satisfaction Surveys

This is one of the easiest ways of tracking customer satisfaction. With this approach, you simply need to put up a survey asking your customers how satisfied they are with your services.

Depending on the medium you are using to administer the survey, you can add one to three open-ended questions to learn more about what they think of your services.

Customer satisfaction surveys can be served through email, through your website, or through your app.

Customer Satisfaction Score (CSAT)

The CSAT is the standard metric for measuring customer satisfaction. Here, you ask customers to rate how satisfied they are with your products or services on a scale. The scale could be 1 – 3, 1 – 5, or 1 – 10.

After receiving responses from various customers, you then find the average rating to determine your customer satisfaction score. The higher the score, the more satisfied customers are with your services.

Net Promoter Score (NPS)

This is another popular metric for measuring how happy customers are with your business and your services.

Unlike the other metrics covered here, however, NPS does not measure how satisfied customers are with your business. Instead, it measures how likely they are to refer someone to your business. This is especially useful for those in the freelance business, which depends heavily on referrals.

The NPS will ask a customer to rate on a scale of 1 – 10, how likely they are to recommend your business to their friends and acquaintances.

NPS Score Graphic

Source: Business2Community.com/strategy/using-customer-satisfaction-metrics-nps-best-practices-02261983

The NPS categorizes your customers into 3 groups:

  • Promoters: These are customers who give you a rating of 9 – 10. They are willing to spread the word about your business and recommend your products and services. These customers are already satisfied with your business.
  • Neutral/Passives: These are customers who give you a rating of 7 – 8. They are indifferent to your business. They aren’t disappointed with your business, but they aren’t satisfied either. They are unlikely to talk about your business to others.
  • Detractors: These are customers who give your business a rating of 6 and below. They are unhappy with your business, and will spread negative word about your business in a bid to discourage others from doing business with you.

The Net Promoter Score is a very useful metric. If someone is willing to recommend your business to others, then this means that your products or services are good enough that they would stake their reputation on them.

Customer Effort Score (CES)

This metric measures customer experience, particularly how hard it is for your customers to get what they want from your business. Customers are typically asked to rate their effort from 1 (very little effort) to 7 (very high effort).

A high score means that customers have to work very hard to get what they need from your business, which translates to poor customer experience.

Social Media Mentions

Keeping track of what people are saying about your business on social media can also help you figure out how satisfied your customers are with your business.

Satisfied customers will take to social media to praise your business, while unhappy customers will share their dissatisfaction with their social media followers.

Monitoring the conversations about your business happening on social media will allow you to step in and respond to comments in time and control your brand perception, especially when people are sharing negative comments.

Here are three tools that you can use to track social media mentions:

4. Put Customer Value First, Profits Will Follow

A lot of entrepreneurs believe that the core purpose of a business is to make profits.

Smart entrepreneurs, those with the right entrepreneurial mindset, on the other hand, know that the core purpose of a business is to serve its customers. Therefore, their core focus is on delivering customer value.

Of course, this does not mean that businesses that put customer value first don’t think about profits. They do. What differs is their approach.

These businesses understand that when you keep your customers happy (by delivering great value), these customers will bring more business, and spread positive word about your business, leading to more business, and ultimately, greater profits.

Actually, the findings of research by Deloitte and Touche show that companies that put customers first are 60% more profitable compared to those that don’t.

So, what exactly does it mean to put customer value first?

Putting customer value first means that every single business decision made within your organization should have a positive impact on customer experience.

For instance, when upgrading its systems, a customer-centric company will choose systems that allow it to deliver the best customer experience.

Similarly, when hiring, customer-centric companies go for employees who show a knack for putting customers first. Basically, every decision is evaluated based on its impact on customer experience.

Here are some tips on how to make your company customer-centric and put customer value first:

  • Understand your customers deeply. It is impossible to put customers first when you don’t even know who they are. To get a good understanding of who your customers are, you need to develop highly detailed buyer personas. Actually, gaining a good understanding of the customer segments you’re targeting is a key component of the business model canvas.
  • Make sure that all your team members are engaged and have a good idea of the impact of their work on customer experience.
  • Make it a habit to collect customer feedback, and then use this feedback to gain insights on how to improve the customer experience.
  • Don’t just focus on getting customers to make the purchase. Focus on building relationships that will turn them into loyal customers and brand ambassadors.
  • Be easily accessible. Make it easy for customers to get in touch with your business when they have an issue, or when they need any sort of help.

Ready To Put Your Customers In The Boss’s Seat?

As an entrepreneur, you are in business to serve your customers, which means that your customers are your boss. If you want your business to thrive, you need to start treating them as such, by putting their needs first.

In this article, we have gone over 4 key points on how to make the customer your boss. Here’s a recap:

  1. Identify the key problems customers want to get solved
  2. Make sure your offering solves those customer problems
  3. Track and measure customer satisfaction
  4. Put customer value first and profits will follow

Free Downloads & Extras From The Episode

“How To Make The Customer Your Boss” (PDF): Get It Here

“The Austrian Business Model” (video): https://e4epod.com/model

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