The Economics of Consumer Behavior (#economics, #consumers, #management)

The following is an essay written for a monthly company newsletter in 2015:

While business books are helpful, I find reading books from a variety of intellectual disciplines helps me gain new perspectives on our industry and business. One of my favorite reads is called “Human Action” by a social philosopher named Ludwig von Mises. Recently, I was struck by the following passage as von Mises commented on what drives consumer behavior:

“The consumers patronize those shops in which they can buy what they want at the cheapest price. Their buying and their abstention from buying decides who should own and run [businesses]. They make poor people rich and rich people poor. They determine precisely what should be produced, in what quality, and in what quantities. They are merciless bosses, full of whims and fancies, changeable and unpredictable. For them nothing counts other than their own satisfaction. They do not care a whit for past merit and vested interests. If something is offered to them that they like better or that is cheaper, they desert their old purveyors.”

Does this sound like our customers? Cheapest price? Changeable and unpredictable? Values their own satisfaction above all else? No loyalty? Keeping an eye on their pocketbook and not yours?

Of course it does! In fact, this well describes all customers, ours, those of our competition and even me and you as buyers of goods and services ourselves.

There’s a simple truth about customer service in a competitive market environment buried underneath this description of consumer behavior. That truth is that our customers have CHOICES. Not one of them has to do business with us. Not one of them has to be impressed by our prices, our commitment to their satisfaction, the quality of our effort or the consistency of our desire to please. If any one of these things does not manage to live up to their expectations, you can bet that our competitors will take notice and provide it to them instead.

But there is more to the story than consumer behavior and competition affecting our customer service, according to Ludwig von Mises:

“The consumers determine ultimately not only the prices of the consumers’ goods, but no less the prices of all factors of production. They determine the income of every member of the market economy. The consumers, not the entrepreneurs, pay ultimately the wages earned by every worker… With every penny spent the consumers determine the direction of all production processes and the details of the organization of all business activities.”

What this means is quite simple. When we adopt innovations or change aspects of how our businesses are organized, they are never changes made arbitrarily. Every change must in some way lead to improved customer satisfaction to enhance the desirability of our offering in the market or the effort is wasted.

When we change computer systems, or business processes, or pay plans, or job descriptions or prices, or anything, these new arrangements must meet the market test. If the changes don’t help us serve our customers better in some way they will not be sustainable. If they don’t help us to provide something better than what our competition can provide, we will find our customers going elsewhere.

It also means we have a responsibility to stay on our feet and try to improve our service offering every chance we get. As a team, we can come up with new processes, new cost structures, new service offerings, new conveniences, new methods of communication and new attitudes toward service that can keep our customers surprised and smiling. In other words, embracing the nature of change and competition in the marketplace can help us “to keep our customers, our customers” (and to help us gain new customers, too!)

Knowing all of this, what are some things you could do to improve the quality of service you and your team provide to our customers every day? And how will you react the next time someone tells you that we’ve got to make changes to better accommodate our customers’ needs? Taking care of our customers how they expect to be taken care of has to be at the center of why we do what we do. You can embrace it or you can resist it– but you can’t avoid it. Which will you choose?