It is preposterous to assume what customers say is more important than where they place their feet and the price they pay for products or services. The customer’s mind is still elusive and challenging for entrepreneurs. If understanding the mind of the customer were easy, everyone would do it!
The insights of the Austrian school of economics tell us that people act purposefully toward future betterment. That is, customers and entrepreneurs both act to attain better future situations than their current situations compared to if they had not acted at all. Customers operate on a value scale, an important insight developed by Carl Menger, elucidating that value is in customers’ minds. In this regard, Menger urged entrepreneurs to “reduce the complex phenomena of human economic activity to the simplest elements.”1
I echo the sentiments of Menger, but some do not. For example, a recent article titled ”2 Simple Steps for Testing If Your First Customers Like Your Product” recommends surveys and the search for “moments of truth” and “tipping points.” The only simple way of ascertaining customers’ product sentiment is through the market itself.
The market process provides excellent insights into customers’ unspoken motives and whether they like your products and services. The best way to figure out if your customer likes your products is to turn to market phenomena. That is, the market price, as reflected by customers’ subjective valuation and competitors’ offerings. Different opinions about the value of a product or service are drawn out through this process. The real test, the market signals, shows how much and to what extent customers are willing to sacrifice to attain your product or service offering.
The customer wants the product with high use value, intended for whatever purposes to help them reach their end. The value of any product is in the customer’s eye, the same way that beauty is in the beholder’s eye! We never truly know to what extent a customer chooses your product over a competitor’s. That is to say, the only reliable data on customer sentiments is that customers have purchased your products—the more, the merrier. Ludwig von Mises in Human Action expressed that ”It is ultimately always the subjective value judgments of individuals that determine the formation of prices.”2
Market prices and exchanges alert the entrepreneur whether the product is more or less valuable to the customer than the forgone opportunity to withhold their cash holdings. Money measures prices, and prices measure value. Buying and selling or market abstention determine prices. As such, prices are what customers are willing to pay for a product based on their subjective valuation, keeping in mind their future benefit from that product.
In his salient book Economics for Real People, Gene Callahan agreed that “only real market prices convey information on the freely chosen values of acting man.”3
Therefore, it is sensible to observe market price signals as a means of analyzing customer sentiments. Customer dissatisfaction and loyalty occur when product or service incongruities exist. Market incongruities also exist between the entrepreneurs’ perceptions of changing market realities. The entrepreneur’s function is to address any market incongruities in which the customer, because of market changes, is better off than they were before. The market is in constant movement, which means customer preferences are in perpetual motion.
Retention of customers is a less complicated phenomenon which an entrepreneur might observe. Only individuals act in concert with one another in a spontaneous way to reach their goals in any given market. As the author of the cited article proposes, the concept of customer retention is somewhat misguided, because retention relates to competitors’ actions and their substitutable products. The question should be, how many substitutable products exist in my ecosystem? Are other entrepreneurs doing something that I am not doing?
First, the customer is the holder of the perception of value. Secondly, the customer making future choices is the cornerstone of the basic axiom of action. While taste preferences change over time, so do the market actions of your customers and your competitors. The first axiom of praxeology is that people act; they act to pursue a better situation based on the choices they are presented with. Mises reminds us of this in his work Human Action. What the customer says and the action the customer takes are two different things, because it is the customer’s action that provides market signals to the entrepreneur. As long as you satisfy the customer’s needs and wants, profits will ensue, and losses decrease.
You strive to get rewarded for the risks involved with bringing new products to the market. Your competitors are seeking the same market reward.
Some do not understand that competition works as a signal of incongruities, leading to profits or losses. Indeed, competition exists so long as customers have market choices and can exercise them. The reality is that customers vote with their dollars and feet. They may voice their liking of your products, but at the same time be enthralled with a competitor’s quality, service, and prices. Competition, therefore, acts as the entrepreneur’s light post, guiding them toward market opportunities that may go unrealized or deterring them from those that are unfit.
Competition, in the Austrian view, is aimed at who can serve the customer best. Providing the best quality and product to the customer is the leading role of entrepreneurial competition. Competition is not and should not be insidious—rather, it should be productive and dynamic. If entrepreneur A wants to enter a market with capital to prove he or she can do things better than entrepreneur B, that should be his or her choice. Entrepreneur B will come to realize they missed many market opportunities only because that knowledge appears as a result of the competitiveness of entrepreneur A. For example, customers may choose the products of entrepreneur A one day and B the next.
It is not what customers say, but what they do. Entrepreneurial insight about the market and the changes that will occur should be the guiding light for entrepreneurs. Entrepreneurs have to ascertain how people will respond to changes. Customer purchases, retention, a likeness of products or services, and loyalty are results of entrepreneurial market observation, and not causes.
- 1Carl Menger, Principles of Economics, trans. James Dingwall and Bert F. Hoselitz (Auburn, AL: Ludwig von Mises Institute, 2007)
- 2Ludwig von Mises, Human Action: A Treatise on Economics, scholar’s ed.(Auburn, AL: Ludwig von Mises Institute, 1998).
- 3Gene Callahan, Economics for Real People: An Introduction to the Austrian School, 2d ed. (Auburn, AL: Ludwig von Mises Institute, 2004).
