What’s The Ideal Age To Be An Entrepreneur? Let Market Conditions Decide.

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[postintro]This is the first article in an occasional series from Professor Raushan Gross on The Institutions Of Entrepreneurship. Entrepreneurship is a powerful pathway to innovation, growth, prosperity, and a better life for all. Its emergence and thriving are not automatic; it requires enabling institutions. Professor Gross will analyze and explain the institutional supports required for entrepreneurship to play its role in elevating society to the highest levels of achievement.[/postintro]

The condition of the market economy is the most critical aspect of entrepreneurs’ success, not the entrepreneur’s age. Yet, who say the opposite; that there is a Golden Age of entrepreneurial success, and it is 45. The combination of the age of the entrepreneur and the right mindset is said to be the perfect formula for market success.

While I agree that everything takes time, I am not convinced that age and mindset are essential for successful entrepreneurial endeavors in the long run. Although age and mindset have a role in success, we cannot disregard the requisite market conditions that are more likely to produce favorable or unfavorable results regardless of age and mindset. Entrepreneurs need a favorable market that rewards their risk-taking. If would-be entrepreneurs who are not in their Golden Age today are advised to wait to see success when they enter their 40’s even under unfavorable market conditions, we are in danger of eliminating one of the economy’s critical functions – entrepreneurship itself.

Conventional thinking about entrepreneurship is changing before our very eyes. For example, there have been significant declines in small business ownership and new startups, and fewer unicorns decade over decade. Why? Let us say that Rome was not built overnight, and neither was the entrepreneur. Products take time to produce; it takes time to develop a network of customers; it takes time for the entrepreneur to develop awareness, it takes time to find the market error that can be turned into an opportunity, and finally, it takes time for the market to adjust to changes in consumers’ tastes, preferences, and perceptions. Entrepreneurs do not acquire human capital in just one day, nor were economic systems created in one day.

Entrepreneurship is a social phenomenon that manifests itself through the passing of time, and application of human energy and capital, and favorable market conditions. No group of persons sat around one day and created our market economy; it took vast amounts of experiences and knowledge to come together, creating a space for the entrepreneurial function to operate for us. If the Golden Age is 45, and there have been declines in new entrepreneurial births, who will the newcomers follow? How will the ranks fill with those who can imitate the paths of successful entrepreneurs or small business owners?

The favorable conditions of a market economy are essential so that an individual at any age can find and pursue meaning in life. The benefit of favorable market conditions is to allow would-be entrepreneurs to find meaningful ways of applying their human capital to serve society’s most urgent needs, making conditions better for both others and themselves. The market provides a means by which one entrepreneur pursuing their own aims can enable someone else with whom they have no direct contact to pursue their own goals. In other words, productivity begets productivity.  Another benefit of a favorable market economy is that it brings forth visible adjustments, errors, new knowledge, and information, against which entrepreneurs can weigh their subjective opportunity costs in assessing the risk of pursuing a possible opportunity.1

In essence, individuals accumulate entrepreneurial skills and opportunity awareness, but they have to act to put them to practical use, and if they cannot, society pays the costs. The costs amount to a decrease in new entrepreneurship, innovations, and knowledge. People pursue endeavors when they are incentivized to do so, and if they are not it will leave a gap in one of the most critical market functions – entrepreneurship. Rome was built through the experiences and knowledge set in motion by many people over time. F. A. Hayek stated:

“the successful combination of knowledge and aptitude is not selected by common deliberation, by people seeking a solution to their problems through joint effort; it is the product of individuals imitating those who have been more successful and from their being guided by signs or symbols, such as prices offered for their products or expressions of moral or aesthetic esteem for their having observed standards of conduct –in short, of their using the results of the experiences of others.” 2

An open economic system, where individuals of all ages (younger, older, and in between) are encouraged to pursue their economic interest considering their subjective opportunity costs, ipso facto is likely to increase new entrepreneurial births. Therefore, the condition of the market economy is a necessary factor for entrepreneurs to maximize their range of choices and ideas, and to discover and innovate. A favorable economic system provides individuals in a society a way to use their human capital to achieve society’s needs, on behalf of people they will never know directly.

Certainly, age and experience play to the entrepreneur’s advantage, but what matters most is the market economy’s conditions.

How will people who are not at the Golden Age react to the current market conditions? They need a measurable market indicator – others’ success. Who will fill the shoes of the entrepreneurs and small business owners who have vanished? We must remember that Rome was not built overnight, and neither was the entrepreneur and the system in which they operate.

 

[1] Kirzner, I. M. (2015). Austrian Subjectivism & the Emergence of Entrepreneurship Theory. Liberty: Indianapolis, ID.

[2] Hayek, F. A. (2020). The Constitution of Liberty. Chicago, IL: The University of Chicago Press.

 

Raushan Gross, Ph.D. is Associate Professor of Business Management at Pfeiffer University.

4 Rock-Solid Basics Carry Entrepreneurs Through Crucial Periods Of Business Transition.

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[postintro]Please welcome our newest guest contributor, Lucy Reed. Lucy is an entrepreneur’s entrepreneur. She created Gig Mine (https://gigmine.co) to help others dig up sharing economy opportunities in a user’s area, all in a single web location, so users don’t have to jump between multiple sites. It’s the new and improved way to get a gig job![/postintro]

Operating a successful e-commerce or small business takes some dedication. Your business needs the right marketing plan in order to attract your first customers, but you also need to take the right steps to keep shoppers coming back. So, if you are an entrepreneur, how can you make the most of your business model? By following a few simple steps that will help you grow your business, protect your brand, and keep your products in demand with the customers that matter most.       

Innovation Can Create and Keep More Customers

 It seems like the world is changing a bit faster with each passing year. You may need some updated tech, improved marketing, or a fresh look to keep up with these changes. So, make sure your business has the resources it needs to adapt and improve to meet the needs of your customers.

If you’re not especially tech-savvy, there are plenty of human and digital resources you can utilize that will ensure your business keeps up with the times. For example, would your customers benefit from a computer or mobile app that makes your product or service more readily available to them? Working with an app developer on an as-needed basis is a minimal but worthwhile investment for taking your website presence to the next level. Do you want to elevate your web design, but a graphic designer isn’t in your budget? Take advantage of online courses (many of which are free) to learn basic coding skills that will help your site stand out from the competition.

Quality Customer Service Will Always Be in Demand

No matter how much tech influences the ways that customers shop, customer service will always be important. Consumers want to know that their money is being spent wisely. So, if your customer service is not up to par, you could lose out on some major profits. If you operate a small e-commerce business, you can create trust and loyalty with your customers by paying special attention to a few key areas.

Give your shoppers the power to answer questions themselves with a detailed, clear FAQ page. You should also consider providing support via live chat or be expedient in answering emails. If your personal and business inboxes are combined, think about creating a business email so you can stay connected to your customers. Supreme customer service will not only help you retain current customers, but you can also offer incentives for online reviews, which can help you attract even more customers.

Social Media Can Be a Powerful Small Business Tool  

Email and chat should not be the only channels for connecting with customers. According to some recent stats, well over half of adults use Facebook or some other form of social media on a regular basis. With so many current and potential customers likely scrolling through their feeds, it only makes sense for you to take advantage of this virtually free marketing opportunity. So, how can you best promote your business online? First and foremost, you need to identify your target customer base so you can tailor your social media presence. Maybe your product will appeal to a younger audience who uses Instagram, or perhaps you’d prefer to focus your efforts on an older clientele who prefers Facebook.

Once you have your demographic identified, start promoting your brand with frequent posts, customer interactions, and even social media contests. In general, you need to have engaging content that’s eye-catching no matter which channel you’re posting on. For example, having a post on Facebook, Twitter, or Instagram with a photo or graphic that grabs your followers’ attention and linking to a product or how-to article on your site is a great way to provide valuable information about your business that drives traffic to your site. If you are new to utilizing all social media has to offer, working with a specialist to build your presence can provide you with immediate and long-term customer engagement.

Negative Reviews and Feedback Can Help Your Business Improve

So far, we’ve focused on the proactive steps you can take to build a positive relationship with your customers, but what should you do when that relationship sours? Dealing with negative customer experiences is just another part of owning a small business. The way you react, however, will determine whether those experiences hurt or help your business. Some customer complaints will show you problems with your operations or customer service model, so take the proper steps needed to address them. Others may simply be a need for the customer to be heard, so in these cases, take the time to just listen. No matter what methods you use to help heal those customer relationships, be sure to do so in a timely manner.

Most people appreciate a speedy response from business owners, and you may be able to save a lot of relationships by being so responsive. But what if after all those efforts, your customer still leaves a bad online review? You should still do what you can to resolve the situation, but also realize that negative online feedback happens to everyone. As long as you have worked to earn enough positive online reviews, one or two unpleasant ones are not likely to hurt your business.

Some negative reviews are not even real to begin with. If you do suspect your business to be the victim of fake online reviews, it’s important to take the proper actions to report those reviews through the proper channels. This guide offers step-by-step instructions on how to report false reviews to Google, Facebook, and Yelp so they can take action to have them removed. You may not be able to get the review taken down right away, but you can at least begin tracking your efforts to prevent review spammers.

Ensure Your Entrepreneurial Success with These Tried-and-True Techniques

Running a successful e-commerce or small business definitely takes some work. Always pay attention to key business factors, like customer service, brand reputation, and online engagement, which can pay off big for your small business. Put in the effort with the steps above and focus on building relationships with customers that will last. Most importantly, believe in yourself and your product so you can better promote your business.

Lucy Reed’s website is gigmine

Photo Credit: Pixabay

 

The Epic Calling Of The Entrepreneur.

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Many of us feel the pull of contributing to something “bigger than ourselves”. It could be a cause, a charity, a movement, a great project. It could be mentorship in a collaborative organization. Some people even claim that working for the government qualifies: representing (or regulating) the people.

But doing something “bigger than ourselves” does not have to be interpreted purely as a collectivist principle (sacrificing the rights of the individual for the common good), nor as altruism (living for others and not for oneself).

Almost 250 years ago, Adam Smith pointed out that it is not out of benevolence that the butcher, the brewer and the baker provide customers with dinner. Rather, it is out of self-interest. Which is an 18th century way of describing the entrepreneurial ethic of service.

Ethic of service

In an entrepreneurially driven market, customers – by buying or not buying, repeat purchasing or not, subscribing or not – determine what is produced. To be successful, businesses serve customers. They spend an enormous amount of time and money to understand customers and their preferences and needs, and expend all of their resources in an effort to meet those needs in the way that gains approval. Customers are rational seekers of betterment – they buy what will make their lives better, from their own perspective. They seek happiness. That’s what entrepreneurs deliver: better and happier lives.

The reward for utilizing today’s resources in ways that generate the greatest future improvement to society is profit. It is society’s way of pointing to where entrepreneurs should direct their best efforts. The ethic of service is sustained by reinvesting profit into more investments that benefit customers.

The epic calling of entrepreneurs is to join and accelerate this cycle of service, betterment, profit and reinvestment. 

Ethic of Innovation

The market in which customers have all the power is highly dynamic. The genius of customers is to be never satisfied. Betterment is their goal, and betterment never stops. There is always something better in the future, and always a new entrepreneurial market entrant or new R&D team to design it and offer it. 

The result of this dynamic is a continuous stream of innovation – new and better products, services, techniques, delivery systems, restaurants, food, payment systems, movies, TV’s, computers, smartphones, and V/R headsets. It’s better service at every store from the high street to the mall, and every dry cleaners and every nail salon and every gas station and repair shop, because innovation includes treating people better while serving them better. The dynamics of the market means that a customer who receives good service from any provider makes that the standard in judging all others. The momentum in the dynamic entrepreneurial economy is always forwards and upwards, towards betterment. 

Ethic of digitization

Digitization brings rapid betterment at an ever-increasing pace. It’s exponential. Entrepreneurs both initiate this phenomenon and harness it. Entrepreneurs brought us the internet and websites and search engines and e-mail and online shopping. They made almost infinite amounts of information available to us – certainly much more than anyone can consume or use. The digital economy brings abundance, the opposite of scarcity, which is what economists have told us is the norm in markets. Under digital abundance, all choices are going to become richer and richer, the cost we pay for things we value is going to become lower and lower (irrespective of what governments do to their fiat money – amazon.com is going to offer more and more choices and deliver better and better quality at faster speeds whatever the state of the dollar; we may pay with a different currency).

Entrepreneurs employing digital means to serve customers better will operate in this new world, pursuing and exploring the digital challenge: what are the boundary conditions of higher quality at lower cost? How can they bring digital betterment to everyone in the world? 

The emerging standard of digital betterment is that new services need to be 10X better than whatever is already in the marketplace in order to get customers to turn their heads, pay attention, and change from their current services, which are already excellent. The resultant compounding of improvement will rapidly elevate our life experiences.

And, in fact, digitization puts customers even more in charge – interactive technology brings more empowerment and control to customers than ever. We can compare prices more easily, benefit from the experiences of others who supply ratings and reviews, perform more tasks more quickly and easily, and orchestrate our own system of services and experiences in exactly the combinations we prefer. Customers will decide which digital providers they choose to allow into their lives. Only the best will qualify, and entrepreneurs will strive to be in that group.

Ethic of private property

It has been pointed out, most notably by Ludwig von Mises, that the entrepreneurial system requires acknowledgment and protection of private property to operate. Investors are free to invest in projects they judge to have the potential for high returns, founders are free to allocate their own time and resources to their innovative ideas, and customers are free to spend their own money on offerings that please them. This private property-based entrepreneurial system has brought the world increasing standards of living and quality of life for roughly 250 years, lifting billions out of poverty and squalor. Today’s entrepreneurs preserve that progress, despite the efforts of socialists to reverse it and replace private property with state ownership and bureaucratic control. No calling is higher.

Better world, better society

There is no shortage of pessimists who see the world through the lens of decline. Most of this is partisan politics, which is, indeed, descending to new lows. Some of it is politics combined with scientism (as in climate change fear). A good antidote to this pessimism is Hans Rosling’s book, Factfulness, which compiles hard data from impeccable world sources demonstrating the incredible, consistent and ongoing global progress in fields like life expectancy, child mortality, reduced incidence of poverty, growth in living standards, levels of education, elimination of disease and even reduced pollution. 

Entrepreneurship makes all of these possible via positive thinking, ideation, innovation, organization, and analytics. But, beyond these functions, entrepreneurship is the dominant force for good in the world. Entrepreneurs are optimistic (because they see the opportunities for progress), polite (because they value relationships), collaborative (to make relationships productive), law-abiding (the wrong side of the law is unprofitable), non-violent (violence is also unprofitable), and civil (because community building contributes greatly to success).

Epic calling

In Yu-Kai Choi’s book Actionable Gamification, which is an insightful analysis of human values, Epic Meaning & Calling is the core drive that is in play when a person believes they are doing something greater than themselves. Entrepreneurs experience that calling. Whatever their individual firm, invention, project or initiative, they feel the higher calling of betterment, and they derive part of their psychic profit from responding to that calling. They feel different and special because of their role and their contribution. 

And their contribution is, indeed, special. They are the drivers of the free market economy that raises everyone’s potential and attainment. They are the pillars of a collaborative culture of achievement and accomplishment. They are the creative catalysts of change. Society is better the greater the role and influence of entrepreneurs.

More of us should respond to the epic calling.

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

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These are interesting times for sure, with many small and large companies making hasty decisions to cut back and, in many cases, to cut out of their budget, the most competitive market tool – advertising.

Companies that are in survival mode should not decrease their advertising spend in the short run. It is an error to assume that customers are not searching for information about a product or service that you can provide. While on the surface, it might seem clear-headed to eliminate marketing activities to protect your firm’s assets, but might we not forget that marketing in general and advertising, in particular, are, in the end, informational devices that drive revenues for the long-run? Everything has a cost, even information, which increases customers’ knowledge of what you offer, location, and price. Advertising identifies sellers to customers and reminds infrequent customers about changes in the state of the market. Companies change what they offer and at what price, along with the changes in customer consumption patterns. Therefore, marketing is an investment, not an expense – this especially rings true for a down economy.

Some say companies that consistently advertise reap significant market benefits more often than competing companies, even during a down economy. Marketing – as far as advertising is concerned – offers firms a market advantage when it comes to customer search costs and brand awareness in the long run. Decreasing marketing and advertising during a down economy comes at a cost to the company and the customer. Cutting advertising diminishes the amount of information in circulation, thereby cutting brand awareness, customer conversions, and unit sales. Essentially, in a COVID economic landscape, firms that do not produce information, i.e., do not advertise and promote their products and services, increase customers’ search costs. In a post-COVID landscape, those firms that decided to decrease marketing and advertising will have created an uphill battle for themselves, making it extremely difficult to break through the noise! If you want to be a market leader, understand that it costs to be the boss!

Marketing is information dissemination, and the firms that do not provide customers with useful information promptly are sure to lose market share, awareness, and customer commitment. Even more costly to the firms that do not advertise during this COVID economy will be the loss of permanence and significance, especially for nascent companies. Newer companies will suffer the errors of not advertising during a down economy in the long run. As opposed to established companies, nascent companies have to break through established brand positions in the market.

Case in point, customers do not know what they need to know unless you tell them – and trust me; they want to know! Without your firm’s marketing, customers will be forced to search and purchase elsewhere. In other words, customers have high time preferences – they want satisfaction now – and added high search costs now will result in a more uncertain future for a company.

Now is the time to be even more vigilant about informing and educating your customers based on specific quality measures, prices, and your offering’s importance to them. Remember, market success is about the delivery of a timely, essential product or service information. Information delivery can be accomplished by incrementally informing customers via content pages, digital campaigns, podcasts, digital marketing, and digital promotions to reap the benefits of digital flexibility that increasingly lower customers’ search costs.

We must also not forget that advertising is a social function. A function that should not be ignored but fulfilled. At the same time, advertising is the primary device in which companies of all types bring forth market opportunities to customers. That is, the information costs incurred by the customer are the driver from not knowing to know. Why would customers cease to accept information from their market providers during a down economy? Do customers cease buying things of importance during a down economy? Brands that are choosing to go dark on marketing must think about the subjective nature of customer value and expectations. Failure to meet expectations in the future will result in long periods of resuscitation going into a post-COVID economy.

There are many new methods on the horizon for you to deliver timely advertising. However, it is best to use the technique most satisfactory to your customer, not to all customers, i.e., customers are different in the information needed. Tailored information delivered to your customer during this slowdown is a moment in time where much ground can be gain in lowering knowledge acquisition costs and increasing rapid-fire production of information. Continuous advertising, during this down economy, enables customer conversions and, at any rate, reduces the information cost for customers who find themselves searching for updates of the state of the changing market.

Knowledge comes at a cost. Therefore, the mistake of not advertising will indeed allow a competitor to reap the benefits of your inaction. Unfortunately, customer information and decision-making often are based on past market conditions. Trust me; your customers will love you for keeping them in mind and lowering their search costs, and showing your commitment to them when times are not so great.

 

Value-In-Experience Is The New Way That Firms See Potential For Value For Their Customers.

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Firms who follow the Austrian Business Model framework are focused on value for their customers – a special kind of value. It’s worth reviewing the history of value theory, and how far it has advanced to the present day.

Goods-dominant thinking about value: value-in-use.

In the past, there was a belief that value was inherent in goods. Tide detergent from Procter and Gamble, for example, boasted special ingredients on which the manufacturer based their promise to make white clothes whiter and colored clothes brighter. The value was claimed to lie in the superior performance of the product formulation. The consumer was the happy recipient of this value that the manufacturer had embedded in the product. This was the prototypical value-in-use scenario, wherein value was created by producers.

Service-dominant thinking about value: value-in-service.

At a later stage in the evolution of value theory, it was realized that the economy was shifting from goods-dominance to service dominance, so the logic of value embedded in products was no longer relevant. Consumers and business customers were not, it was further realized, passive recipients of value. Services are a two-way interaction in which the customer is as active as the service provider. Value, it was identified, is co-created by the service provider and the customer. Think of IT services provided by a vendor to a customer. The customer makes the service value possible by identifying or prioritizing the problem to be solved or the performance to be upgraded; by providing access to the building and/or computer systems; and by providing people to assist and direct the IT service provider. Co-creation of value becomes the norm in service exchange.

Further, it was realized that Tide is actually the provision of a service to the consumer of helping with laundry tasks. The consumer buys the product for the service it provides, The consumer also provides the washing machine, the timing and occasion of the washing task and the kinds of clothes being washed, feedback about performance, and additional aspects of co-creation of value. Therefore co-creation of value became the standard value theory for both products and services.

Value-dominant thinking: value-in-experience.

Businesses have now advanced further in their value theory and value provision. It is now realized that there is no value unless it is identified by the end-user, either the consumer or the business customer. Value is formed only in their domain. In this context, value has a new definition. It is value as an experience. Value is a feeling in the customer’s mind. Customers first appraise a value proposition made by the service provider or goods manufacture – a promise made to them that they evaluate: is there anything in this proposition for me? If so, the customer compares the proposed value to all the alternative substitutes available on the market, as well as comparing the proposed value to not buying at all, saving money for a future purchase opportunity. If they detect relative value, they will make a decision on a value exchange – actually parting with dollars to acquire the service or good that’s on offer.

The most important part of the value process follows: the customer uses the product or service and evaluates the experience of doing so. How does it feel? What emotions are they experiencing? A feeling of satisfaction? A feeling of ease and convenience? A feeling that the experience is better than anticipated? Or worse? Does the task performance feel as enhanced as the service provider promised?

The customer steps back after this cycle of anticipating value / appraising relative value / value exchange / value experience in order to make a final decision: was the overall experience valuable? If they feel that it was, they will enter the cycle again to repeat the experience so long as the same feeling continues to be available to them.

Implications.

There are significant implications for firms and brands who internalize this new understanding of value-as-experience.

  • They realize that they cannot create value. Value-creation is standard business school terminology, but it is not an accurate description of the value process. Firms can only facilitate value as a contribution to the customer’s value creation. Facilitation means designing a value proposition based on an understanding of customer needs and preferences. It means making a value promise to those customers to make them aware of the potential for new value. It means monitoring customers in their evaluation, exchange and experience. It means understanding their final value appraisal, and the experiential emotions behind it. Facilitation is complex and requires constant attention, but the final decision is the customer’s.

 

  •  The skillset that is required for successful value-facilitation is built on customer empathy. Empathy is a boundary-crossing capability – it’s as applicable to the production department and the IT department as it is to the marketing and sales departments. Understanding the mind and emotions of the customer is job 1 for everyone in the contemporary firm.

 

  • The standard mode of action for the value-facilitating firm is responsiveness. They continuously monitor changes in customer preferences and their changing assessment of their options and priorities. They know that customers are continuously adjusting, rebalancing, re-evaluating and re-assessing their choices and decisions based on their life experiences. They are comfortable with this mode of continuous change. They are flexible and agile, avoiding rigidity and hierarchy. They don’t let bureaucracy or any other organizational design attributes get in the way of responding to the customer.

 

  • The ethic of value-facilitating firms is service. They understand that the customer’s preferred experience includes a feeling of trust in their chosen service providers and brands.

Value facilitation is the new required core competency for firms and entrepreneurs. It’s hard to learn through case studies because the process is so dynamic and responsive to changing market environments. It requires every one of your employees, all your software and all your data collection capabilities to be focused on empathic understanding of customer behavior and the deduction process to determine the changing emotions and preferences behind that behavior. We try to explore value facilitation and value-in-experience in depth in the Economics For Entrepreneurs podcast.

 

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