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Your Value Proposition Language Is Your Customer Commitment And Your Company Culture.

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Peter Drucker is famous for, among many other pieces of business wisdom, his statement that “there is only one valid definition of business purpose: to create a customer”.

That’s a statement with a lot of punch and a lot of clarity. It dismisses all the contemporary alternatives in the debate about the purpose of business firms, such as maximizing shareholder value or sustainability and environmental protection or stakeholder theory.

How do firms create customers? Peter Drucker was equally clear on this question:

“Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

It’s certainly sound advice to place marketing and innovation at the front and center of business operations. Since 1954, when Drucker’s book, The Practice Of Management,  was published, there have been great advances in defining how marketing is conducted and how innovation can be successfully introduced to the market.

The most recent advances have come from the field of economics, a discipline that is dissolving the walls that previously existed between it and psychology and cognitive science, and discovering a new understanding of how and why customers make their economic decisions to buy or abstain from buying, to increase or decrease their usage levels, and to maintain or abandon loyalty to a service provider or a brand.

The new discoveries concentrate in the phenomenon of value. Business language has embraced value in the past, and shifted its focus from value creation (the idea that value is produced within the firm) to value co-creation (the idea that value is produced jointly in an act of exchange between a service provider and a customer). Now, economics – and specifically that brand of economics known as Austrian economics – has identified that all value is created by the customer. It is the customers’ investment of time and effort and emotional commitment and intent to better their circumstances that creates value. Value emerges in the customer domain.

Behind this discovery is a new definitional understanding of value. It is a feeling in the customer’s mind, an experience that’s unique to each customer. Only the customer can have the experience. New research is revealing more about the experience – for example, that it is a learning experience. It takes place over time, beginning with an anticipation or estimate of future value (“what’s in it for me?”), an appraisal of relative value (“is it worth it?”), an exchange experience (the act of buying), a usage experience (the act of using the good or service) and finally an assessment of whether the experience met the expectations of the initial anticipation. The customer is busy and highly engaged in the physical, cognitive and emotional processes of value.

Where does all this leave the firm, and their marketing and innovation activities? The new discovery is that the successful firm is a facilitator – rather than a deliverer or creator – of value. There are degrees of facilitation ranging from passive (e.g. making a purchase opportunity available on an e-commerce site) to active (e.g., providing help-desk or personal service in real time when the customer is experiencing product usage), and many in between.

The pivot in the shift from value creation to value facilitation is the new role of the value proposition. Firms can create new information of which the customer is unaware, such as the development of a new service or the addition of new features to an existing service. Customers want to appraise the potential value represented by new information. They will make the decision, and they give some weight to information from the service provider.

The first element of information in a sound value proposition is empathy. The value process begins with the customer’s pursuit of betterment. They give a signal to entrepreneurial innovators that betterment is possible: the signal is dissatisfaction. Customers can create value but they can’t design their own products and services. Their genius is to always want something better. The responsive entrepreneur diagnoses their inarticulate dissatisfaction using a highly tuned sense of empathy. The value proposition communicates to the customer that the entrepreneur expended significant effort at empathic diagnosis.

The next element of the value proposition is a promise. While unable to create value, firms and brands can promise that they have worked hard to find a way for their customers to  experience value. The value proposition must demonstrate to customers that

  • You recognize them as individuals. Show evidence.
  • You understand their current dissatisfaction – reveal your empathic diagnosis.
  • You offer a credible promise of relief.
  • You reinforce your offer with reasons-to-believe. Before the customer engages emotionally, they want to engage rationally.
  • You have a clear statement of benefits that you can demonstrate are greater than the customer’s cost. The customer’s cost includes not just willingness to pay, but also opportunity costs such as inertia, alternatives and value uncertainty. Help them with their economic calculation.

The value proposition sets the customer’s value learning process in motion: anticipating, weighing, exchanging, experiencing, assessing. The value proposition is your commitment to the customer that the process will be worthwhile, satisfying, enjoyable, and, ideally, beyond their expectations.

And this valuable exercise in making a promise does much more. Through its language, it becomes the culture of your company. Starting from Peter Drucker’s definition of business purpose, every employee, supplier, agent and partner should know their role in creating and retaining a customer.

In the language you use to recognize your customer and their dreams and hopes, their individual context and their preferences and desires, you’ll communicate to your organization how to love the customer and develop relationships. In the language you use to describe the customer’s current dissatisfaction, you’ll nurture an empathic organization. In the language you use to make a promise, you will embed commitment to keep it. In the language of credible and rational support for the promise, you’ll cement internal belief in the promise-keeping mission. And in the language of benefits to the customer, you’ll set the standards of customer-facing behavior and customer relationship management for everyone in your firm.

Yes, a value proposition is just language. In business strategy, language is all we have to tell each other how we will collaborate around a purpose, to share the tools and tactics we’ll all use, and to communicate the successes and learning opportunities that come from implementation and promise-keeping. And, most importantly, to invite the customer to allow us into their value learning process.

Value Proposition Deisgn and Template 5-minute audio for hh.com

Why All CEO’s Can Benefit From A Familiarity With The Austrian Business Model.

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For our Economics For Business initiative, we have adopted the motto: Think Better, Think Austrian.

Everyone in business can benefit from studying and understanding the fundamentals of economics. By this, we do not mean the economics of GDP and employment levels and the money supply, and not the economics of the Federal Reserve and the Treasury Department. We mean the economics of human action – how and why individuals behave the way they do in markets, in buying and selling, and in everyday life. Businesses are successful when they fit into and contribute to the everyday lives of customers, and economics provides understanding of how to do so.

The brand of economics that helps you to think better is called Austrian economics, because it originated at the University of Vienna. You may have heard of the Chicago School of Economics, made famous by Milton Friedman and others. Many so called “schools of thought” are named for their geographical origins.

Austrian economics is a tool for business because its thinkers have developed a particularly rigorous body of economic theory, and its practitioners have translated the theory into a complete toolset for application in business. Mainstream economics is not particularly useful for business, for many reasons. Insofar as it deals in fictitious aggregates such as GDP or “the automobile industry”, it can’t help firms who are making decisions about real resources to serve their customers and enable their employees. Insofar as it mathematicizes economic processes for analytical ease, it can’t help firms who deal in trust, loyalty, service, and human values, rather than equations. Mainstream economics can’t be used to strengthen your business model.

Austrian economics, on the other hand, can provide exactly that level of practical utility. In fact, Austrian economists have developed an Austrian Business Model to demonstrate the applicability of this brand of economics in business. The ABM is a framework from which any company can develop or refine its own unique business model suitable for our fast-accelerating digital age. If you are a CEO contemplating the sustainability of your firm’s business model, the ABM will provide you with some new ways of thinking.

A new way to think about value.

Value is one of those terms that is used loosely in business, which leads to flawed understanding. Business schools and business writers refer to “value creation”. Often, they mean market value, the dollar difference between the stock market value of the number of shares outstanding at one point in time and some earlier point in time. Sometimes they equate revenue or profit generated with value. In these cases, value is objective and can be calculated and allocated a dollar denomination.

Austrian economics defines value as subjective. It is a feeling in the customer’s mind, a complex outcome of cognitive, emotional and biological processes, both conscious and unconscious. Value emerges for customers as they live their life and try to assemble an ecosystem of services to help them make it better. This value is context-dependent, idiosyncratic and changeable. This value is created entirely in the customer’s own domain. Firms can’t create value.

This is a very different premise than we are traditionally taught at business school or even in the everyday language of business discussion. For example, a popular book on business models makes this statement: there is something about some firms that makes them more profitable than their rivals. In the framework of the ABM, we would say: there is something about some customers’ desired experiences that makes facilitating them more profitable than other customers’ desired experiences.

This value perspective can stimulate some new behaviors in firms.

  • Obsessive and total focus on the customer — identifying them, understanding them, letting them lead the process of value creation.
  • Selection of a precisely defined group or cohort of customers as your audience, with continuous development of ever deeper and more detailed understanding of their subjective preferences.
  • Development of a value proposition — a hypothesis about how you will help the customer to an experience that they will value. It’s simply that — a hypothesis that you will test as much as possible for verification, but which is never proven until the cycle of market exchange, experience and evaluation is completed.

This business model starts with developing deep understanding.

A new business relationship with value.

Value is what customers seek. Their life is a search for value and an assessment of whether value was realized in their everyday experiences. If your business can not create value, what can it do? The answer is : facilitate value – make it more possible for customers to enjoy their experience.

A design approach can be used – experience design. Experience design consists of imagining every element of the customer’s experience, based on their value learning cycle. What is it about your value proposition that will make them anticipate a valuable experience? What will make them feel that this experience is preferable to any alternative they have, direct or indirect? What will cause them to exchange value — give their dollars for your offering — and what is the price they will be willing to pay? What ensures that they will assess the experience positively after the event?

The key to design is (1) to imagine every possible element of the subjective experience, empathically embracing the customer’s individual context; (2) to understand that every little detail counts and that small differences in delivery can make a huge difference to the perceived experience. In fact, since customer service is so highly developed in modern economies, it is the small details that generate differentiation and uniqueness for your brand.

Since the business is never in control of value, it is important to make measurement part of experience design. Once in the marketplace, your value proposition goes “wild”. You no longer control it. The customer is creating the value and you are not. The best you can do is to be available if they want to invite you into their process, and to be observant of their behavior. Measurement is observation. Don’t presuppose, but do collect data, preferably qualitative data at the individual customer level. This is your raw input for continuous improvement.

Phase 2 is a customer-led design and assembly phase for the entrepreneur.

An experimental approach to value exchange.

Austrian economics sheds bright light on exchange – the transaction between seller and buyer. Exchange is governed by uncertainty – a business can’t know or predict with accuracy what the customer is going to do in the future, or how they will view the terms of exchange. Will the customer perceive sufficient value to even enter into exchange? It’s the ultimate market test. The customer is weighing the benefits they subjectively perceive against the costs, which include money but also any other difficulties or barriers they perceive to making the exchange. Is participating in your offering totally convenient (which is the general standard today) or is there anything in the experience that makes it less convenient and less compelling?

The best way to solve this challenge is to experiment with as many offer bundles as you can in order to observe market results. Does your service sell better online or direct-to-customer? Do customers prefer to subscribe or to buy by the unit? If they try, do they convert? Test as many bundles as you can.

Once you have established the right bundle and willingness to pay, calculate your cash flow and choose your costs in order to generate the margins and profits you require. This is the opposite of the margin math taught in business school, where firms calculate their costs and then add a margin. Austrians discover the price the customer is willing to pay, and then choose the costs compatible with that willingness to pay. The customer determines the price of the exchange, not the business.

Phase 3 is an experimenting and testing phase for the entrepreneur.

Value Agility

You’ve achieved some marketplace results. You’ve established that the customer perceives value in your offering and they’re willing to pay a price that generates positive cash flow and profit.

That same marketplace is incessantly changing. Your approach to the 4th stage of the Austrian business model is dynamic. You make sure that you have all the feedback loops required to receive marketplace data about the acceptance of your offering, and any changes in customer preferences and competitive behaviors. You manage 360 degree monitoring of the customer experience and you anticipate and expect that your experience design, however excellent, will erode over time. The customer will demand something even better, and competitors will aim to match or improve on your delivery. It’s important to keep your model of customer value preferences fresh, and to be planning and preparing new and improved value facilitations. You find ways to maintain flexibility in your capital structure to facilitate the required agility.

Agile businesses continually test and evaluate innovations, and introduce them to the marketplace. Value improvement and value innovation are your goals. The process never stops. The journey never comes to an end.

Your business model must yield sufficient cash flow for substantial amounts of new capital investment each year. Your organizational design must facilitate the addition of new capabilities and the discontinuation or de-emphasis of existing capabilities that no longer are perceived as unique or compelling by the changing customer. Agile businesses monitor their dynamic capability — how much is being added, how much is being changed or updated. Are you keeping up with the customer, the ecosystem in which you engage, and your competitors?

Phase 4 is a phase of continuous dynamic change for the entrepreneur.

You can learn more about the Austrian Business Model here.

 

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

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In an attenuated Christmas Eve podcast, we highlighted four of the useful principles we covered during 2019.

Principle 1: Customer Sovereignty – Which Means Putting Your Customer First.

The economists call it customer sovereignty – the principle that it is the consumer who ultimately decides which businesses are successful and which are not, as a result of their purchasing (or not purchasing) entrepreneurial offerings. Stephen Denning calls it The Law Of The Customer. John Rossman calls it Customer Obsession.

Entrepreneurs who understand the leverage of customer sovereignty do everything they can to know and understand their customer’s goals, values and feelings. They seek out negative emotions – disappointments, unease, a feeling that things could be better – because these are the inputs for designing new offerings that customers will welcome to make their lives better and relieve their unease.

The method of Austrian Economics in this regard is empathy. It’s a soft skill you can nurture and develop with practice. Use the empathic diagnosis tool that we provided earlier this year (link below).

The techniques for empathy include the Means-End Ladder (understanding customers’ goals, or ends, and why they select the means they choose to attain them) and Listening From The Heart, a market research technique given to us by Isabel Aneyba.

Check out these episodes and PDF resources for a deeper understanding of Customer Sovereignty:

Principle 2: Avoid Competition.

The mainstream economics concept of competition considers firms competing to sell identical goods to an identical audience. Entrepreneurs take the opposite tack: they choose a select group of customers whom they understand deeply, and they assemble a unique set of capabilities to deliver unique, customized solutions.

The tools we presented during the year include differentiation and branding. Differentiation is the pursuit of uniqueness in your offering. It requires providing your customer with a means to achieve their goals that is different and better than any alternative. That can be faster, or easier to use, or more comfortable, or more personalized, or some other attribute or combination of attributes that the customer prefers. Differentiation is not achieved through pricing. It’s achieved by superior understanding of your customer and their subjective goals.

Trini Amador demonstrated how to capture differentiation in a brand. A brand is a promise – a unique promise only you can keep to help customers achieve their ends. It’s a promise that customers can embrace emotionally, and that you can deliver consistently, every time with certainty and without exception. Promises must be kept. Trini provided us with a templated process for brand building.

Check out these episodes and PDF resources for a deeper understanding of competition:

Principle 3: Dynamic Flexibility.

Austrian economics has always been on the leading edge of dynamically flexible resource allocation and capital assembly. Austrians see the worth of capital purely in the future revenue streams that it can generate from customers. If customers change, and the revenue stream changes, the worth of the capital has changed. The capital structure of a firm must change to reflect changes in the marketplace.

This applies to hardware, software, human capital, processes and methods and organization. Old capital must not be allowed to eat up resources that could be better used to serve customers in new ways.

With the arrival of the digital age, dematerialization, interconnectedness that can support rapid assembly and disassembly of global networks and supply chains, practitioners are now able to apply in practice what Austrian theory has been saying all along.

Dynamic flexibility is well-captured in the methods of the Agile revolution, as Steve Denning explained. And the ultimate expression of dynamic flexibility is innovation – the dynamic flexibility to supplant old technologies, old services, old organizational structures with new ones. Curt Carlson gave us his formula for successful innovation, and it’s very Austrian: always start with the customer’s need.

Check out these episodes and PDF resources for a deeper understanding of Dynamic Flexibility:

Principle 4: The Economics Of Value.

We finished the year with three episodes on the new economics of value. It’s the opposite of traditional economic thinking for entrepreneurs – the economics of scale and cost reduction. The economics of value entail selection of the smallest customer group to serve in the best possible way, so that they can experience maximum subjective value. It involves scaling down – personalization, customization, scarcity, limited availability, and high differentiation. We published a simple guide to the economics of value.

Mark Packard shared his latest research on the economics of value and specifically how customers experience it. They do so as a learning process, one that takes place entirely beyond the entrepreneur’s line of visibility – in the customer’s perception. Mark explained the neuroscience as well as the economics behind the process, and introduced a 5-part cycle of customer value learning. We published a flow chart and a set of explanatory slides, using pizza as an example.

The power of the value learning cycle is that it replaces the concept of the funnel for entrepreneurs. The funnel has built-in inefficiency – wide at the top and full of costs, with revenue at the end where it’s narrow. There’s a lot of waste. The value learning cycle, when used effectively, engages a small group of customers well-known to the entrepreneur, and guides them logically to an experienced benefit that they assess positively.

Check out these episodes and PDF resources for a deeper understanding of how customers experience value:

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