Monday, February 21, 2011

Social vs Market Norms in Business Ecology

In one of the earlier posts, I mentioned about two different markets in which we humans operate -social market and financial market. The rules in these two places are vastly different. In the financial market we are cold, calculating utility maximizers. Whereas, in the social market our transactions are fuzzy and not governed by clear lines of loss and gain. For example contributing to an NGO makes us feel warm and nice, and we do not expect to be paid for our efforts and time. Financial loss in some situations makes us happy, as in the case of charity.

Now it is important to remember that rules of the two markets should not be mixed. When social and market norms collide, trouble sets in. Take sex as a case in point. A guy takes a girl out for dinner and a movie and he pays the bill. They go out again, and he pays the bill once more. They go out a third time, he is still springing for the meal and entertainment. At this point, he is hoping for at least a passionate kiss at the front door. His wallet is getting perilously thin, but worse is what is going on in his head: he is having trouble reconciling the social norm (courtship) with the market norm (money for sex). On the fourth date he casually mentions how much this romance is costing him. Now he’s crossed the line. Violation! She calls him a beast and storms off. He should have known that one can’t mix social and market norms- especially in this case- without implying that the lady is a tramp. He should have also remembered the immortal words of Woody Allen: “The most expensive sex is free sex.”

On a more serious vein, we can also examine company- customer or company-employee relationships that often are at the crossroads of social and market norms. Whoever started the movement to treat customers socially had a great idea. If customer and company are family, then the company gets several benefits. Customer loyalty pays companies in more than one way. But companies pouring crores in marketing campaigns to create social relationship – or at least an impression of social relationship – do not seem to understand the nature of a social relationship, and in particular its risks.

For example, what happens when a customer’s cheque bounces? If the relationship is based on market norms, the bank charges a fee, and the customer shrugs it off. Business is business. While the fee is annoying, it is acceptable nonetheless. In a social relationship, however, a hefty late fee – rather than a friendly call from the manager or an automatic fee waiver – is not only relationship-killer; it’s a stab in the back. The consumers will leave the bank angry and spend hours complaining to their friends about this swindler of a bank. No matter how many cookies, heart tugging visuals, mushy slogans a bank provides one violation of the social exchange means that the consumer is back to the market exchange. It can happen that quickly. If you are a company it is advisable to remember that you can’t have it both ways. You can’t treat your customer like family one moment and then treat them impersonally – a moment later when this becomes more convenient or profitable. This is not how social relationships work. If you want a social relationship, go for it by all means; but care to remember that your behaviour needs to be consistently social.

A similar mix up is happening in company-employee relationship in today’s world. Companies see an advantage in creating a social exchange. After all, in today’s market we’re the makers of the intangible. Creativity counts more than industrial machines. The partition between work and leisure has likewise blurred. The people who run the workplace want us to think about work while we’re driving home and while we are in the shower. They’ve given us laptops and blackberries to bridge the gap between workplace and home. Companies try to create an environment through social exchanges in order to make workers loyal, passionate and innovative. In treating their employees – much as in treating their customers – companies must understand their implied long term commitment.  If employees promise to work harder to meet a deadline, if they are asked to get into a plane at a moment’s notice to attend a meeting, they must get something similar in return- something like support when they are sick, or a chance to hold on to their jobs when the market threatens to take their job away.

Although some companies have been successful in creating social norms with their workers, the current obsession with short term profits, draconian cost cutting, increasing the variable pay in the salary package and layoffs threatens to undermine it all. In a social exchange after all, people believe that if something goes awry the other party will be there for them, to protect and help them. These beliefs are not spelt out in a contract, but they are general obligations to provide care and help in times of need.  Social relationships deliver great things; however it demands responsible corporate behaviour.


  1. Enjoyed the read. Consistency is the key. Look at how a Company treats its employees. The customers will be no different. Employees can be replaced but customers will not.

  2. Thanks sir for your comment. Keep visiting. I hope to remain regular with my posts

  3. The frustrated dating example that you have quoted typifies social exchange theory, that posits that posits that all human relationships are formed by the use of a subjective cost-benefit analysis and the comparison of alternatives.

  4. Yes true; it can be explained by social exchange theory as well. Thanks for your comments

  5. nice read sir,
    i wonder about the last paragraph though, cant there be a way to assign an economic cost of companies policies alespecially the hiring and firing norms? these decisions have an impact, the obvious are the costs of replacement but how to ascertain the loss of image, thus depriving from a future talent pool who may use this information to form a negative bias ( thereby laying foundation to the argument why people prefer large firms?), today's information age the argument more compelling. Case in point hiring of IIM grads by PSUs during 2008-09.