Thomas E. Vass, Market Economist and Business Capital Advisor

www.BusinessCapitalAdvice.com

Heather O’Sullivan Canney, Community / Niche Marketer and Social Media Specialist

www.HeatherO.com

How New Markets Emerge

According to the theory of technology evolution outlined in Predicting Technology (Vass, 2007), new markets emerge in a time series of micro bifurcations in market demand. Much of what happens when a new market emerges is related to what consumers do when they see a new product for the first time.

The consumer’s brain is furiously searching and sorting millions of images and patterns, trying to come up with something that looks like the new product. Some brains may be able to come up with images or memories of something that “fits” with the new image they are seeing.

The brain is trying to come up with an answer to the question “Hey, what the heck did we do the last time we saw something like this?”

If the “fit” between the older images and the new product is close enough, the subpopulation of consumers may take a risk and buy the new product in order to confirm that the new product may solve their problem better than the older product. The subpopulation of consumers in the market that can come up with the right fit between old images and the new thing usually is usually very small at first.

Most of technology evolution can be explained in terms of a series of micro market commercialization events, not as technological production events, as more consumers try out the new product. As the new images are sorted and filtered, each image is run by the brain’s internal benefit-cost calculator, which is trying to judge how the new thing may fit into the brain’s utility function.

Each consumer brain has a welfare, or utility function, that the brain is trying to optimize, and all the new products are risky for the brain to assess because it does not really know how the new thing may work out. The sequence of events that precedes the market emergence concerns two types of “fit.” In some cases the two brain processes occur simultaneously, but in the great majority of cases, the brain finds a prior fit, and then only later, in the “AHA!” moment, the brain fits the new thing into how it fits with the consumer’s buying patterns.

The first fit is between images in the brain as it tries to come up with something that looks like the new image, and the second fit is between the new image and the consumer welfare function that the brain is continually trying to optimize.

Economists like to call this second process the “maximization of consumer welfare.” Much of contemporary economic theory is based upon how markets reach equilibrium in supply and demand as consumers go about the task of maximizing their welfare, with money prices serving as the indicator of value that they place on the consumption of the product.

New markets begin to emerge when a small niche of brains decides to try out the new thing. In the older markets, a new market tended to emerge slowly compared to the emergence of new markets today because the transmission of knowledge and information between consumers was mediated by huge public relations and advertising efforts designed to shape and influence how the brains perceived new and existing products.

In the new markets of today, the emergence is much more rapid because consumers have social media platforms, like Twitter, to instantly communicate with each other about how the new product “fits” with their consumer welfare function.

As the newer forms of social peer group pressure and social networking takes place, one consumer gets on Twitter and tells many other consumers about the new thing. Social scientists like to refer to this social process with a very fancy term called “intersubjective verification of reality.”  It means that the truth of an image about what it is can be confirmed by what other people say that it is. When all the opinions about what the new thing line up, then those opinions become the reality of truth.

The verification by other people tends to be a substitution of the actual experience for consumers who have never tried the new product, but are relying on the advice and guidance of people that they trust and “follow” on Twitter.

The older products and older forms of marketing are not idly sitting around, waiting for their markets to be disrupted by the new thing. Nor are the even newer newer things sitting around waiting to see what is going to happen to the first generation of new products.

In current economics, those older things are called existing products, and the dynamics between the old and the new is called “market competition.”

Micro market bifurcations occur when the newer thing starts to displace the older things in buying patterns that used to satisfy the consumer utility function. This is generally an irreversible process, and the theory of technology describes these irreversible events as a downward sloping market demand curve that looks a little bit like a Siamese cat’s tail that has a kink in it.

When a new thing is so new that nothing like it has existed before, its appearance in the marketplace may cause a very big disruption called a Macro Bifurcation. Some economists, like Clayton Christensen, of Harvard University, have called these really big market events a “radical or disruptive innovation.” Christensen makes a distinction between “sustaining” innovation, which is generally improvements to existing products, and “radical” innovation, which is generally about new-to-the-world products.

What is getting disrupted by either type of innovation is the market demand for existing products, which affects all of the related products that are sold in the same market. This is one reason why owners of existing products are generally opposed to unbridled and uncontrolled innovation and why they spend so much money on political lobbyists to help them maintain the status quo.

And, by the way, it is also the reason why there is a political threat to the continued expansion of a free internet exchange of ideas.

The only good innovation, seen from the financial perspective of existing products, is controlled innovation, that the makers of existing products, of course, would like to control. This is one reason why large corporations spend so much research and development money on university research. Corporate funded university research  is a very controlled platform for innovation, that the corporations control, without having to worry too much about a rogue idea making its way into the marketplace.

The university tech transfer offices also like this revenue model of controlled innovation because they can rely on the large corporations to pay large licensing fees, while the non-controlled innovation revenue stream is a lot more iffy.

Radical, uncontrolled innovations are usually hard to see at first because they are such small events in the marketplace. But, right now in history, we are seeing a really big radical innovation that is disrupting an existing marketplace.

Social media, like Twitter, has the great potential, in fact, to be the tidal wave of all radical innovation. Twitter is creating  a macro marketplace bifurcation. The tidal wave that Twitter is causing will have the related consequence of rendering most of contemporary economic theory obsolete because future exchanges will be based more on the values of trust and information, than on the value of money prices.

In the newer economic theory, new markets evolve and there is never a return to the prior equilibrium.

From Market Exchanges Based on the Value of Price to Exchanges Based on Trust and the Value of Information

The future market is never going to look the same or be the same after a macro marketplace bifurcation. You are never going back and ride your horse to work once you’ve tried out that new-fangled car. And that riding crop that you needed to goad your horse to go faster? It is simply not getting the job done anymore.

Going through a macro market bifurcation is just like slipping through a very tiny window of opportunity into the future, and once there on the other side, a huge new, unforeseen economic reality spreads out. This must have been just like what Daniel Boone felt like when he finally got across the Blue Ridge mountains, coming from North Carolina and emerging into the blue grass of Kentucky.

Enter Twitter.

Twitter is a social media innovation that is a macro marketplace bifurcation. What you do in the market after you first Twitter will never be the same as what you did before you Tweeted for the first time. The images being sorted in your brain will never be the same.

Twitter is a macro market bifurcation because it totally changes the dynamics of marketplace competition because it changes the currency of exchange. In other words, Twitter is creating a new marketplace and displacing the old marketplace of exchanges based upon money and prices. The older money exchange market was primarily based on the idea that consumers would try to find the lowest cost product that satisfied their needs.

Twitter changes the currency of exchange. But, more significantly, because Twitter is based on a web 2.0 platform that allows for greatly expanded interactive marketplace exchanges, including e-commerce, it is also replacing the entire older market of bricks-and-mortar shopping centers.

Twitter is the latest evolution in the social media market that is moving towards a more open, transparent exchange of ideas. Twitter’s new characteristics would include:

1. No permissions required for user comments. Unlike the earlier versions of social media like FaceBook or LinkedIn, there is no guard at the door of each Twitter account, saying “Sorry, you do not know them, and can not come in here.” The greatest freedom and access to other users is a trend in the market for social media, which allows a much greater diversity and rate of exchange of ideas, product reviews, opinions and advice. In the theory of technology, the greater diversity of exchange leads to the greatest rates of product innovation.
2. Real time, dynamic exchanges of ideas and information among users. The dynamic interchange on Twitter moves the earlier instant messaging ball down the field. The cartoons in Doonesberry, where Roland is totally engaged in Twitter, and self-absorbed with himself, is a harbinger of things to come in the dynamic world of social media cause and effect. Roland cannot wait to see his next update, and neither can all the users who are following Roland.
3. Brevity as a virtue. The lack of clutter and visual content on Twitter is a new development in the world of social media. Prior versions of social media were based on the premise that the internet was a teaching platform where many of the users wanted to write voluminous content to “educate” other users. The Spartan format of Twitter allows users to consume huge quantities of information in very short bursts of time and content.

The characteristics of Twitter will cause the marketplace to change in 5 fundamental ways.

1. Push versus Pull Markets

A good way to imagine one big difference in markets caused by Twitter is to remember one of Doctor John Dolittle’s favorite animals, the pushmi-pullyu (pronounced “push-me-pull-you”). In its earlier versions, the  pushmi-pullyu was an antelope/unicorn which had two heads at opposite ends of the body. Whenever it tried to move, both heads would go in opposite directions, and the animal would stay stuck in the same place. Economists call this place equilibrium.

In the 1967 Doctor Dolittle film, the pushmi-pullyu was instead portrayed as a double-headed llama. Dr. Dolittle meets the pushmi-pullyu on his voyage to Africa to save the monkeys.

New markets in the past had a hard time emerging, or moving in a direction away from equilibrium, because of price barriers and information frictions. It was as if the older markets, and older techniques of product marketing and advertising had two heads, both of which thought that the existing equilibrium of the status quo market was just fine.

Because Twitter allows users from any place and any industry, and any socio-economic class background to connect and build relationships, the market moves, and the monkeys are saved. But, it moves on pull, not on push marketing. Pull means that consumers buy goods and services based upon who they know and trust.

Consumers are attracted to other consumers, who they follow on Twitter, looking for advice and guidance. They are “pulled” towards those advisors because they trust them more than they trust the advertising and marketing campaigns they see in other media venues.

So, for example, if you want to buy a car, and you happen to be following @myersauto on Twitter, and you trust myers, you go to his Twitter page and see what he has to say about cars. You do not need to toggle or google strangers that may not be reliable, and with whom you have no pre-existing relationship.

The marketing and advertising in the older market is based on autonomous isolated consumers who make decisions based on their own independent welfare function. Economist call this idea of an isolated utility function “non-interdependent,” because the welfare function being maximized does not contain an element of another consumer’s welfare.

As long as consumers could be kept isolated from other consumers in the older market, push marketing worked because it was based on the notion of “pushing” the product onto the utility radar screen of independent consumers.

Push marketing does not work well when consumers share data and information freely. In other words, the old market and the old marketing schemes are being disrupted by a new pull marketing platform of Twitter.

2. Exchange Based Upon Trust For Maximum Fit and Not Lowest Cost

Relationships on Twitter are usually pre-existing, and are formed prior to any type of market exchange. Often, a consumer may be following a profile just because the Tweets are interesting and informative. Generally, the brain is sorting images about that informative and interesting profile and making a mental note that the person could be a helpful “friend” at some point in the future.

During the pre-existing phase of the relationship, the brain is checking for a fit between the information and the welfare function. Many years ago, Kelley and Thibaut, (1959), social scientists at the University of North Carolina, described this part of the relationship as the “antecedent” relationship.

For them, the antecedent social exchange is all about establishing trust, and not being abandoned or exploited in the relationship.

For exchanges based on Twitter relationships, the prior experience allows the consumer to obtain free information about how the new product, or existing product, may achieve a better fit with the maximization of consumer welfare. Twitter also enables product designers and developers to ask for and get the input and direction of the consumer. Questions and requests for feedback of existing products or requests for news ones can be sent out en masse and real time results used in determining what products will be a “fit” for the respondents. Obtaining the better fit is a greater priority than obtaining the lowest cost. The better fit, in other words, has a much greater value than the value associated with the cheapest good.

Almost all of contemporary economic theory is based upon the idea of value being obtained by the lowest cost, not maximum fit. Some economists refer to the new emphasis on obtaining a better fit as “value-added” exchanges. Twitter is replacing the older market of lowest cost-based transactions with “value-added” exchanges based on pre-existing relationships.

3. Exchanges Based Upon On-Going Extended Periods and Not Instantaneous Events

Leon Walras, a French economist, wrote about the mythical auctioneer, who stood in middle of the mythical marketplace, matching supply and demand, instantaneously, between millions and millions of autonomous buyers and sellers who never again saw each other after the transaction.

The instantaneous autonomous exchange between strangers is an integral part of the contemporary theory that allows all of the simultaneous differential equations to reach zero at the exact same moment in time. When the second derivatives of all the differential equations reach zero at the same moment, most economists heave a self-satisfied sigh of relief and smile quietly to themselves that economic Nirvana has once again been achieved.

Alas, if relationships endure after the exchange, then maximization of welfare must occur over an indefinite future. This would require a very large integral equation to be solved.

Twitter is based on relationships built on extended conversations and continuing engagement. One example of how this affects transactions is something called “service after the sale.”

If consumers are following a problem with a cell phone provider, to take a real-life example, and see that the cell phone provider is engaged (@sprintcare) in solving the issue, the followers on Twitter will make a mental note of that support.

Following Kelley and Thibaut again, the post-exchange experience between the two parties becomes relevant for each party to maximize utility from the exchange. The new macro market bifurcation caused by Twitter is based on both pre-existing relationships, and enduring post-exchange relationships.

This is an entirely new development in the marketplace, based on the value of a good fit both before and after the exchange.

5. Investments Made With Social Capital Not Financial Capital

The smartest economist in modern American history was a Russian who came to America in the late 1920’s and taught the rest of his life at New York University.

Wassily Leontief pioneered a matrix method of economics by explaining how capital invested in a national economy tended to change all of the “technical production relationships” among thousands of firms in the market. Today, economists would say that investments tend to affect the global supply chain of inputs as a product winds its way from raw resources to the final demand marketplace.

Leontief confronted head-on the major theoretical short-coming of traditional equilibrium theory about how markets reach equilibrium. He carefully, if not garrulously, explained that the primary intellectual deficiency in contemporary theory was that it could not explain how the concept of “capital” could be both a money unit and an investment unit.

In other words, the value of a capital investment is measured by capital, as a money unit. It measures itself, as it were.

In traditional theory, the concept of capital can mean two entirely different things, and the meanings are vicariously invoked by the adherents of contemporary theory, depending on the facts and circumstances of the argument at hand.

Taking just the most common usage of the term for financial capital, Leontief showed how a change in investment capital affected thousands of inter-industry relationships. His work has been honored in the economic profession by the universally accepted naming of his method as the “Leontief Inverse.”

His method is widely misused today by local chambers of commerce and economic development agencies in hundreds of political lobbying cases to describe how the income and multiplier effects of a public industrial recruitment incentive will lead to a great increase in regional jobs and incomes.

Twitter is displacing the idea of financial capital investment with the newer concept of “social capital.” Under the Leontief method, financial capital changes the recipe of how a good gets made. Economists call this idea a change in the production technology of inter-industry relationships.

Leontief’s method of explaining how capital investment changes relationships can also be applied to understanding how social capital investments change the structure of personal linkages and social networks. An investment in the social capital of a social media platform like Twitter, changes the entire set of social relationships in the market.

In other words, Twitter changes the marketplace by replacing exchanges based on prices to exchanges based on relationships. The macro market bifurcation caused by Twitter looks just like the blue grass of Kentucky did for Daniel Boone. After social relationships in the market change, you can never go back to North Carolina because it would not be the same place.

Once you get on the other side of the future market, you can never go back to the older market because the future market created by social capital investment is completely different than the older market based on money prices. The market becomes an evolving social network of relationships. For brief moments in time, social relationships in the future markets may be stable, which would tend to look like an equilibrium in today’s economic language.

Follow Us To The New Market

The first task for a new user on Twitter is to designate who they want to follow, and then to elicit other users to “follow” them by “tweeting” valuable content. The term following is a Twitter euphemism for relationships. Other social media platforms call this idea “friends” or “fans.”

Any one on Twitter can follow anyone else. There are no barriers. It is an open and diverse social network where relationships are based on the value and individual merit of the information exchanged between users. If the value of the information is low, then very few followers will be gained.

Twitter creates a new equal opportunity for individual success based upon the idea of equal access to knowledge and information. The older market was based primarily on unequal access and control over knowledge and capital. This is the difference between a market based on unequal power relationships and open markets based upon equal opportunity for all.

Critics of twitter often note that many twitter users rarely use the medium after they first open an account. Others state that they “don’t get twitter”. This is because the social capital is in the content.  You can’t open an investment account and then expect to make a withdrawal, or even earn interest without first making a deposit! Of those who would claim that the information posted to twitter is of “low value”, the proof is in the marketplace. Millions of users visit twitter daily, and those who provide valuable content, and actually engage with other users show measurable results in the increased value of their social capital.

A recent study by Wetpaint and the Altimeter Group shows that companies that are “engaging” with users via social media experience as much as a 24% higher bottom line than those trying to use traditional “push marketing” approaches in the same medium. Clearly, connection is as critical as the content. Or, in the words of Chris Brogan and Julien Smith, “Marketing spend might start at awareness, but in the Trust Economy, communities are king, and ROI stands for Return on Influence.”

In summary, the market has shifted. The market platform of “the old way” has cracked. As more and more consumers embrace the new medium and technology, and become more aware of the availability of consumer driven alternatives, the chiasm will simply increase. The only question is, what side of the gulf will you be on?

We have been on a public education mission of speaking, writing and consulting, both to educate and offer expertise on how consumers can use Twitter to increase their social capital. Our combination of economics and social media public relations offers a unique perspective on the relevance between economics, emerging markets, innovative technologies. Our goal is to provide a comprehensive view of how social media, like Twitter, is changing the concept of “capital” as we knew it in the past.

For more information, or to share information with your company, group or team, via consulting, speaking engagements or custom workshops, Contact Heather O’ Inc. online at www.HeatherO.com, via twitter.com/HeatherO or by phone at 919-427-7770.

Thomas Vass is a Regional Economist who specializes in advising business owners and individuals in leveraging knowledge about innovative technologies and emerging markets to maximize the value of their capital. You can follow him on Twitter at tvass2.

Heather O’Sullivan Canney is a Marketing and Social Media Specialist for Professionals and Entrepreneurs.  She helps business owners increase their capital/value using a value driven, niche focused approach and community marketing utilizing Social Media.

This entry was posted on Sunday, August 23rd, 2009 at 10:31 am and is filed under Ideas For Starting A Small Technology Business. http://tvassontechnology.com

Are you considering starting a new business? Would you be if “they” weren’t telling you that you are crazy?
My husband and I recently launched a new business. I have to admit that it wasn’t exactly “on purpose”, but through a chain of events (that I call “divine intervention”).
“Everyone” told us that we should “get a job”. This is the worse time to start a business, “there will be plenty of time for your dreams later”, blah, blah, blah.
Fortunately, we chose to do it anyway! Whether you are wondering if you should start a business, or stay in your business, here are a few tips that will help!

1. Seek & Find:
For many, this “recession” is the opportunity of a lifetime! If you ever lamented during the real estate or stock market boom that you “missed out on the great deals”, congratulations! Here’s a “second chance”! Many people who have lost their jobs, hated them anyway! You CAN CHOOSE whether to make this “the best thing that ever happened or the worst!”
Some of the greatest and most successful companies were started during the depression, and recessions! Look for and find information to support what you are doing. You can look for discouraging news or encouraging! Both are out there. You will always find what you are looking for!
“Why to start a business during a recession”
Recently laid off? Here’s a good one:
Grateful They Were Canned

2. Tweak Your Product
Look at what you are planning to do (or are currently doing) and think about how it can help others during this time. Can you provide a product or service that provides people an affordable alternative to what is out there? I don’t mean “slash your prices” necessarily. I do mean offer smaller items, smaller portions or “value packages”.

3. Supportive People
Surround yourself with positive people. Period!
This is one of THE most important! There are a lot of “dream stealers” out there! They don’t mean to, but for many reasons, Sadly there are a lot of people who live in a self created world of “impossibility” mostly due to years of “negative programming” by other “can’t do people”! Some just don’t believe they can live their own dreams and don’t want others to succeed because they would then have to face the truth that they could too! This can be difficult. Especially when the naysayers are family and friends. I speak from experience when I say that you can tell them “You aren’t helping me. I need people to love and support, and believe in me right now”. If they truly love you (or are a true friend), they will understand. If they don’t…you know the answer! ( I lost my “best friend” this way and trust me, it’s hard, but the best thing for you!). You CAN hang up the phone, not answer the phone, not watch the news, etc.
Bottom line: there are a lot of “negative voices out there”, make sure you have enough positive ones to drown them out! (this includes your own!)

4. Supportive Surroundings & Systems:
Do whatever you can to stay focused! Use systems, schedules and lists to be productive! Every day WRITE down your purpose for that day (This is not your “to do” list).
Systems: Have a “ta da” list! For me this creates a visualization of how great I will feel after I accomplish what I need to do, not the dread of a long list of tasks.
Surroundings: Look around you! If you are surrounded by clutter, etc. Clean it up! Create a space that makes you feel “on top of things!”. This may just be a small corner, or closet! Check to see if there is a coworking space in your area. Most are very affordable places that you can go and get around other like-minded people and feel like a “business person” not a “wanna be”. I cannot stress the value of this enough! If you’re thinking “I can’t afford it”, I would say you can’t afford not to! You WILL be more successful and get more business! (Increased success of startups at Affinity Lab). If there isn’t one in your area, go to networking events and meet folks that would like to start a “jelly”

5. Take classes, go to networking events, & LEARN! Nothing will boost your confidence more than learning something new! Guaranteed! I highly recommend reading books, magazines and other materials, but nothing takes the place of getting around other human beings and learning with and from them! (If you are out of work, or business is down, you have the time!)

7. What’s your “Claim to fame?”
This is the first thing I ask potential clients. Many don’t even know! There are zillions of consultants, sales reps, etc. out there. Why should anyone choose you? In most cases this means “focus on a very specific niche”. This scares most people. They are terrified of leaving money on the table by not targeting the whole planet. I promise, when you dilute your message, you dilute your profits!

8. Marketing and Branding
This is a “biggie”. Everyone says they can’t “afford to…” Again, can you afford not to? When everyone else is pulling back on marketing, it’s MUCH easier (& cheaper) to get your message out there! Make sure your message is clear and consistent though! A strong brand will always save you money in marketing! Always! It will make a stronger, longer impression. If money is tight, find someone to help you with your brand first and then be strategic in getting out there in an effective and affordable way.

9. Use Social Media/Social Networking
This is one of the most effective ways and affordable ways to build your business with a little time and little or no money. MAKE SURE you do it right though! Take the time to research, take classes and learn about how to use them! I recommend facebook, twitter, linkedin and inside area codes. (You DO have time! In fact, when you don’t have an abundance of money is usually when you have the most abundance of time!). Go to networking events, social events and anywhere else you can meet new people! Most are free and you make connections with prospective clients, people who can help you, and add more “#3′s” (supportive people) to your life!

10. Last but not least! Have faith and be grateful! Yeah, I know that sound frivolous, but I can guarantee you won’t “make it” any other way! You absolutely will not succeed at anything if you don’t believe you can. Write down affirmations/ have someone you can call when you start to have doubts. Start and end every day with “I am grateful for….” and I absolutely promise you that you will have more to be grateful for!

God grant me the serenity to accept the

Stimulus Plan I cannot change,

The courage to create my own,

and the wisdom to know the difference!

I was listening to the “Ric Edelman” show on the radio this morning. He had some great insight regarding the current “Economic Headlines”. He pointed out that they all currently contain some variation of “Dow at lowest point in 18 years”, which implies that “the market” is at it’s lowest point in 18 years. The truth is, however, that it’s not. (follow the link to read the rest of his story).

The Truth is, there is good news out there! You just have to look for it!

The truth is, that it’s hard to find “the truth” these days! The media unfortunately no longer reports the news as “a community or public service”. The news is a “business”. A very profitable business. A business where the belief is that it has to be bad to sell.
BUT! You can look for good news, refuse to “enroll in” the bad, and you can demand a change.

Don’t complain about it and then support it! Do what my friend did and “call them on it”.
Spread good news wherever and whenever you find it!
You can start by sending it to us to post here at “Good Soup”!