Power & Market

On the Mises Institute’s Economics For Entrepreneurs podcast, Dr. Per Bylund has stated more than once that entrepreneurs who can develop an understanding of both the laws of economics and the mind of the customer can thereby create a competitive advantage and a successful business.

The laws of economics he refers to are the principles of Austrian economics, including customer sovereignty, subjective value, and dynamic flexibility in resource allocation. Our podcast has covered these and many more from the entrepreneurial perspective. We pursue a value-dominant logic: that the role of the entrepreneur is to facilitate valued customer experiences; that value is in the mind of the customer; and that the tools of value facilitation for the entrepreneur are empathic diagnosis and imaginative innovation.

In other words, entrepreneurs need to understand the mind of the customer. Does this mean that we are crossing over some demarcation line between economics and psychology? Not at all. Economics seeks to explain why economic actors behave in the ways we observe them behaving. What motivates them? What incentives are at work? How do they make choices? The answers to these questions can form the building blocks of entrepreneurial success.

The analytical tools for the construction of an understanding of the mind of the customer are all freely available from the Austrian economics canon. In a new e-book, Understanding The Mind Of The Customer, a publication of the Mises Institute’s Mises For Business project, we offer an ordered presentation of some of the most important of these tools for entrepreneurs.

The Means-Ends Ladder

People select the means that they judge will best help them achieve their self-selected ends. It’s helpful for entrepreneurs to visualize the means-ends progression as a ladder or a pyramid. At the top are the ultimate ends that people pursue. Those ends are always values that they hold dear — values such as “a life of comfort” or “family security”. They are not material. People buy material things because they make a judgment about how those things will contribute to a feeling or an experience they value.

Just below the highest values on the means-ends ladder for consumers are the emotional benefits experience as a result of consuming an offering from an entrepreneur. These benefits are feelings, and it is through feelings that consumers experience economic value. For a consumer of a cola beverage, the emotional benefit might be feeling refreshed or energized or even joyful. If the beverage is consumed in a group setting, there might be a feeling of bonding or shared fun. Feeling better is a benefit that consumers seek from all their economic transactions. Feeling better is a means towards the achievement of higher values.

Supporting the emotional benefits, in the sense of occurring before them on the means-end ladder, are functional benefits. To continue with the cola beverage analogy, these might be good taste, and a distinctively enjoyable carbonated mouthfeel. The beverage container might be particularly convenient, and it may cool quickly in a refrigerator. The functional benefits are the means for the consumer to experience the associated emotional benefits.

The functional benefits result from features and attributes of the product or service itself. The consumer experiences these via sense perception, and they enable — are the means to — the experience of the higher-level benefits.

The base of the means-end ladder is the assortment of contact points at which the entrepreneur can make the consumer aware of the offering that will eventually escalate them through all these rungs of the means-end ladder. Contact points might include a retail store, or online advertising, or a coupon in the mail or word of mouth recommendation.

The means-end ladder is a business tool built on Austrian causal-realist logic. Stripping away the academic terminology, we can provide entrepreneurs with a useful tool with which to analyze the mind of the consumer when they contemplate, choose, consume and experience an economic good.

The Subjective Value Cycle

Subjective value is an important subject in economics. It’s even more important in entrepreneurship, where it is fundamental to what entrepreneurs do. It’s the critical factor in entrepreneurial success. Business schools talk about “creating value” and “value added” as if value creation were an objective process. But it’s not. And businesses can fail if they misunderstand subjective value, because they can easily produce something for which there is no market.

Value lies entirely in the mind of the consumer or customer. Therefore, the task of the entrepreneur is to try to understand consumers’ feelings and preferences, and to design a value experience — an experience in which the consumer will achieve desired ends by utilizing means made available by the entrepreneur. Ends are individually selected, and the entrepreneur can not forecast the ends for which a value proposition might be utilized. Value is uncertain.

Utilizing empathic diagnosis to give dimension to (some) customers’ ends, the entrepreneur designs a potential consumer experience — a good or service that is unique — for validation. Using economic calculation and resource assembly, the entrepreneur advances the design to the marketplace at a cost that he or she believes will yield a profit because the value it represents to the customer is greater than the price the consumer will pay, which is, in turn, higher than the production cost.

If the consumer does, indeed, experience value, the entrepreneur is encouraged to produce more and spread the word to additional consumers of the opportunity to experience value. Advertising and marketing are fundamental to the value formation system. More consumers experience the value, and spread the word even further. Some make suggestions about further improvements to the experience, which the entrepreneur can attempt to incorporate in future iterations. The process continues endlessly and the entrepreneur and the consumer practice continuous dynamism.

The subjective value cycle is a system of value formation. Our free e-book provides a map of the system for entrepreneurs to follow.

Values As A Basis for Brand-Building

People adopt values as ends in themselves, and as a signpost for prioritizing their preferences and choices. Entrepreneurs who fully understand and embrace consumers’ system of values can create strong brands — forms of advantaged intellectual property — and build strong relationships of loyalty and preference for their offerings.

What are the values that consumers hold so dear? Milton Rokeach was an American sociologist who wrote The Nature Of Human Values, reporting on his extensive research. There are 18 values that are classified as the “highest” that people strive for — they define people’s lives. They include Freedom, Family Security, A Sense Of Achievement, Wisdom, Pleasure, and 13 more.

In addition, Rokeach also identified 18 instrumental values: guides to their behavior when they are pursuing their ends, and a signpost for prioritizing their preferences and choices.

Entrepreneurs who can identify the values that guide customers’ choices can be more accurate in designing and communicating the ways that their offerings fit into people’s lives. When consumers recognize their own values embedded in brands and branded communications, a strong bond is created.

Empathy For Entrepreneurs

Empathy is the most important skill in entrepreneurship, and it is critical to achieving the uniqueness that characterizes successful entrepreneurial offerings. Uniqueness is a characteristic of customer perception, and empathy helps entrepreneurs to define and understand others’ perception.

Empathy is a human action: the action of understanding and even experiencing the feelings, thoughts and experience of another. Entrepreneurs employ it to understand subjective needs, dissatisfaction and unease among target customers — with a view to meeting the need, resolving the dissatisfaction and ending the unease. Entrepreneurs begin the value design process with an empathic diagnosis.

The new e-book provides a detailed description of the use of an empathic diagnosis tool called a Contextual In-Depth Interview. Understanding consumer feelings in the consumer’s own context is the key to diagnostic accuracy. Processing the results from the diagnosis will help the entrepreneur to improve consumer experience functionally, cognitively and emotionally. Consumers can be confident of a future feeling of betterment because of the empathy

the entrepreneur has exercised in developing an understanding of them, their dissatisfactions and their unique individual preferences. The entrepreneurial system is best for everyone because it’s based on empathy.

The Customer’s Opportunity Cost

Entrepreneurs are not in competition with other entrepreneurs. Rather, they compete with the customer’s opportunity cost. Opportunity cost is what the customer gives up in order to purchase your offering. Is that a direct substitute? An indirect substitute? Or a different use of the same dollars? (“Does she buy the dress or buy the handbag?”) Or, quite possibly, non-purchase or savings. Understanding the customer’s opportunity cost is an important part of making a sale.

Successful entrepreneurs train themselves to see opportunity costs in the way the consumer sees them. To do so, entrepreneurs can employ an opportunity cost calculator. It solves an equation: consumer value = the value of what the entrepreneur is offering minus

the customer’s perceived opportunity cost of acquiring it. The consumer’s cost is not only in dollars (and their alternative uses for these dollars) but also in the time and effort and convenience and fun of making the transaction.

The entrepreneur applies the discipline of the opportunity cost calculator for every potential consumer transaction.

Customer Journey Mapping

There is a technique to compress all of this Austrian entrepreneurship thinking into a single analytical tool: the customer journey map. This technique decomposes a customer’s purchase and usage of a service into a series of stages, and asks the question, “What is the customer doing, thinking, experiencing and feeling at each stage?”

This technique is a sound application of Austrian economics. It starts with human action — what is the observed behavior? Then, it asks about motivation (why did they act?). Finally, it examines the consequences of the action — customer experience — and tries to probe the emotional benefit, defined as feeling.

Customer journey mapping enables the kind of negative feedback that is most useful in the service improvement process. Does the customer’s experience fall short? When? At what stage? Why? Under what circumstances? All of these negative feedback hooks can be pointed towards opportunities to improve, further enabling the dynamic entrepreneurial system of betterment.

A Valuable Bundle of Tools and Techniques

Our Understanding The Mind Of The Customer e-book describes these six techniques, with accompanying tools, either in the text or via e-links. You can preview one chapter , and, if you would like to receive more, we’ll send it via e-mail to a valid address.

According to new data from the US Bureau of Economic Analysis, the personal saving rate in the US in September 2019 was 8.3 percent. That puts it near a six-year high, and comparable to the saving rate we saw during the early 1990s.

Indeed, the personal saving rate has been heading upward steadily for the past eighteen months. And that's a bit of an unusual thing. For at least the past fifty years, the saving rate has tended to increase when the economy is doing poorly, and decrease when the economy is doing well.

We saw this in the last 1970 and earl eighties during the age of stagflation and the 1982 recession. We certainly saw it in the wake of the 2008 financial crisis, when the saving rate quickly rose from a near-low of 3.8 percent in August 2008, more than doubling to 8.2 percent during may of 2009.

But if the BEA's numbers are correct, that pattern appears to be over, and Americans appear to be more willing to save even when job growth continues to head upward.

This change could be a result of several factors. It could be Americans are less confident about their prospects for future earnings, even if the current job situation appears bright. Many could be less confident that the assets they do have will provide a cushion in case of crisis. For example, many Americans may have learned their lesson about the myth that "housing prices always go up."

The fact that these numbers are averages makes it especially hard to guess. After all, surveys suggests a very large numbers of Americans are saving very little.

For example, CNBC reported in January that "Just 40 percent of Americans are able to cover an unexpected $1,000 expense, such as an emergency room visit or car repair, with their savings..."

A separate survey "found that 58 percent of respondents had less than $1,000 saved."

Regardless of who is doing it, however, increased saving can be a good thing for the economy overall. For instance, even if only the rich are the ones saving more, their saving increases the amount of loanable funds, decreasing the interest rate, and making lenders more likely to lend to riskier borrowers. That's good for farmers and small business owners.

Moreover, as the wealthy refrain from spending, they increase the value of cash held and spent by people at all income levels. For example, if the rich are spending less on restaurant meals and pickup trucks, this means the prices for those items are not being bid up as much. When the rich save, that means fewer dollars chasing goods and services, which can lead to more stable, or even falling prices. That can be good for many people at lower income levels.

Nonetheless, many mainstream economists continue to get hung up on the idea that saving "too much" hampers economic growth. For example, in a recent article at the Wall Street Journal titled "Americans Are Saving More, and That Isn’t Necessarily Good" Paul Kiernan writes:

if saving outstrips investment opportunities for a long time, some economists say, it can hold down interest rates, inflation and economic growth. Such “secular stagnation” may leave less room to cut interest rates, making it harder for the Federal Reserve to boost growth during downturns.

“Rather than being a virtue, saving becomes a vice,” said Gauti Eggertsson, an economist at Brown University.

This is an old story we've been hearing for years, and the idea that there is too much saving certainly received its share of promotion during the 2001-2002 recession, and during the 2007-2009 recession.

Economists do recognize that more saving helps increase loanable funds — and thus puts downward pressure on interests rates — and reduces inflation. But more saving does not, as they think, reduce real economic growth.

True, it might reduce economic growth as measured by government stats which mostly just add up money transactions . But properly understood, economic growth increases with saving, because the capital stock is increasing, making it easier for entrepreneurs to deliver new goods and services — and more goods and services — to consumers. As Frank Shostak explains, we need more saving to create more and better goods:

What limits the production growth of goods and services is the introduction of better tools and machinery (i.e., capital goods), which raises worker productivity. Tools and machinery are not readily available; they must be made. In order to make them, people must allocate consumer goods and services that will sustain those individuals engaged in the production of tools and machinery.

This allocation of consumer goods and services is what savings is all about. Note that savings become possible once some individuals have agreed to transfer some of their present goods to individuals that are engaged in the production of tools and machinery. Obviously, they do not transfer these goods for free, but in return for a greater quantity of goods in the future. According to Mises, "Production of goods ready for consumption requires the use of capital goods, that is, of tools and of half-finished material. Capital comes into existence by saving, i.e., temporary abstention from consumption."

The common view among many economists today, however, is that it's better for economic growth to make sure more people spend every last dime on trinkets at the discount store. Those who have been around long enough to remember previous business cycles will remember that this idea manifests itself during times of recession as pundits insist it's our patriotic duty to spend more, in order to create economic growth.

In truth, in a time like today, the best thing people can do is save more. We live in a time of multiple economic bubbles and non-productive sectors of the economy fueled by inflationary monetary policy. When recession finally does come, vast amounts of debt will never get paid back and immense numbers of "assets" held on balance sheets will evaporate. The result will be a lot of lost jobs and a lot of failed businesses. The only real cushion will be real savings which will be badly needed in a time of recession.

We are happy to announce a new book by Nicolai J. Foss, Peter G. Klein, and Matthew McCaffrey, Austrian perspectives on Entrepreneurship, Strategy, and Organization, now available from Cambridge University Press. This short volume is a concise introduction to the work that's been done over the past few decades applying and extending the ideas of Austrian economics in the management disciplines. It's well-known that Austrian economics places entrepreneurship at the heart of economic theory, but Austrian work, especially the ideas of writers like Mises, also has a lot to offer scholars in disciplines like strategy and organization studies. The table of contents is as follows:

1. Introduction
2. What is Austrian Economics?
3. Entrepreneurship
4. Extensions of Entrepreneurship Theory
5. Strategy in an Entrepreneurial Perspective
6. The Entrepreneurial Nature of the Firm
7. The Future of Austrian Economics in Management Research

Most important, the book is available free of charge until November 18th, so be sure to check it out!

Oct. 31 marks the 11th anniversary of the release of the famous bitcoin whitepaper. It is worthwhile to take stock of the first crypto-currency’s impressive achievements to date, while also warning of the future perils it faces.

Bitcoin has defied the critics repeatedly, being declared “dead” many times over. (In this respect it’s appropriate that it was born on Halloween.) Although its price has been volatile, it’s currently trading at a market cap of $170 billion — more than McDonald’s, and comparable to CitiGroup.

Along the way, internecine battles led to a “hard fork” and the creation of “Bitcoin cash” (in August 2017), but the cryptocurrency community emerged wiser. As for the future, ironically a piece of otherwise good news — faster computing power — may pose serious problems if the promise of “quantum supremacy” should be fulfilled.

An estimated 5 percent of Americans hold bitcoin, and the global number of users is probably around 25 million. More impressive (and precise) details concern the financials: as of this writing, some 18 million bitcoins have been “mined” — the metaphorical term describing the procedure by which a new bitcoin becomes recognized as belonging to someone’s address on the blockchain — and a single bitcoin currently fetches a market price of about $9,450. For something that critics derided as a tech fad that would soon evaporate, that’s a rather impressive accomplishment.

Read more at The Hill