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Tuesday, March 3, 2020

Consumer Sovereignty: When Customers Have the Power

In a market system, customers are the real bosses.

Image Credit: Pixabay by gonghuimin468

You’ve certainly heard—and probably strongly disagreed with—the phrase, “The customer is always right.” And I get it. Sometimes a customer is factually, provably incorrect. If you’ve ever worked in a customer-facing job, you’ve encountered at least one of those customers. I know I have.

But the principle of the customer always being right isn’t meant to be taken literally. It doesn’t mean that any individual customer is, in all cases, actually correct. More than anything else, “the customer is always right” is meant as a reminder of who is actually in charge of a business.

Your Choice, Your Voice

It’s easy to fall into the trap of thinking that we, the lowly consumers, have no real say in what goods are produced or what services are offered. We’re often told that big-wig CEOs and business owners have so much power over us and our lives. But the truth of it is that we, the consumers, are the ones with all the power.

Here in the US, we enjoy a largely free-market economy. That means commercial exchanges—the buying and selling of goods and services—are voluntary. Yes, there are certain regulations, restrictions, requirements, and limits. No, it isn’t a pure free-market economy, but it’s reasonably close. And the goods and services that we have available for purchase are optional.

And when I say optional, I mean that no person or entity is hovering over us saying, for example, “You have to purchase Ivory brand soap.” If you go to the pharmacy on the corner, you’re going to find at least a dozen brands of soap available. Bar soap, gel soap, lotion soap, liquid foaming soap. Soap for hands, soap for faces, soap for bodies. Soap for deep cleansing, soap for sensitive skin, moisturizing soap, exfoliating soap. The list goes on.

Why does it matter that we can choose which brand and form factor of soap we want? Because each of us is different. We have different priorities, preferences, and needs. If we as consumers—the people who buy and use a final product—don’t want or don’t like any of these soaps, we don’t have to buy them. We can buy the soap we do want. Or we can go to a different store that offers soap options we like more.

The producers who make the soap that best serves the needs and preferences of the most people will prosper. The producers who fail to serve enough people will lose money.

Which producers make money and which lose money is entirely in our hands.

Consumer Rule

This doesn’t just apply to soap, either. The reality of consumer-driven business was described by the economist Ludwig von Mises as “consumer sovereignty.” In is book Bureaucracy, he described it like this:

The real bosses [under capitalism] are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or is cheaper, they desert their old purveyors.

This kind of consumer-rule is the closest we come to having a true democracy anywhere in the world, a democracy where every vote really does matter.

Consumer sovereignty, however, only exists where there is economic freedom. In order for consumer voices to be heard and meaningful, our decisions have to be voluntary.

Think about the kinds of products and services that offer the widest variety, the lowest prices, the highest levels of customer service. Think about the most unique and niche needs and desires you have that are actually satisfied by the products and services you have access to. Now think about the opposite end of that spectrum. Where are you the least satisfied by the goods and services available to you?

Speaking for myself, I find I’m most satisfied by the offerings of the market in areas where there are the fewest restrictions and barriers for business owners. Areas like skincare and beauty products, food, fashion, technology, and entertainment. The areas I’m least happy with tend to be where there are a lot of outside restrictions and barriers. For me, these include health insurance, telecom and internet service providers, utilities, and sanitation.

The specifics for you are likely different, but I’d wager the themes are similar. Generally speaking, in the areas of our economy where there is more freedom and fewer restrictions, consumer satisfaction tends to be much higher than in areas where there is less freedom and more control.

When our choices are artificially limited, fewer people will be satisfied with the offerings. Normally, this would signal to entrepreneurs that there’s money to be made by filling the gaps. However, when entry into these areas of the market is restricted, it becomes less likely that an entrepreneur with a stellar idea is able to start the business that could satisfy our unmet desires and needs.

Economic freedom not only gives us access to goods and services that we like, but it also gives us the ability to support businesses whose values we agree with. Our spending sends a powerful signal to entrepreneurs; in some cases, they’ll change entire business models to suit our preferences. In short, we, the consumers, are ultimately the sovereigns of our economy. Your preferences are the ones that are accommodated. Your values and desires are the ones that are catered to. But only when entrepreneurs and business leaders are free to do so. That’s the key.

If a business is not meeting your expectations, you have the power to cause it to change or even close completely but only if you’re free to choose a different provider. If a business does not offer a product that matches your needs and values, you have the power to modify its product line but only if you’re free to choose a product that does. And the only way your freedom to choose in the marketplace matters is if business owners are also free to enter, exit, and change to please you.