Wednesday, October 5, 2011

The Experience Economy

How are we supposed to make sense of changes in the economy? One of the best perspectives I've read recently is The Experience Economy: Work Is Theater & Every Business a Stage by B. Joesph Pine and James H. Gilmore , a business classic from 1999.

They begin with a vivid example. The cost of the coffee in your morning cup is about 1 or 2 cents a cup when it is bought as a commodity on a wholesale commodities exchange. When a manufacturer grinds and packages it and sends it to the grocery store - turning it into a good - the price of your cup is about 5 to 25 cents.

Buy it in an ordinary diner, a standard service offering, and it will cost you 50 cents to a dollar.

However, when you buy it in Starbucks with elaborate extra brewing and preparation and pleasant surroundings, it's $3. In a five star hotel after dinner, $5 or $6.

And if you order it at Cafe Florian in St Mark's Square, Venice, sitting in the crisp morning air immersed in the visual splendor and sounds of one of the most beautiful spots on earth, you willingly pay $15 for that same cup that is worth two cents as a commodity.

Experiences are vastly more valuable.

This progression of value is all the more important and urgent, because they argue most existing goods and services are getting commoditized. They are getting standardized and automated and turned into the equivalent of that 2 cent coffee.

Commodities are fungible "stuff" which can't be differentiated beyond basic grades - for example, one barrel of sweet crude oil is much like any other. The only way to escape this relentless downward pressure on prices and profits is to rise up the progression of economic value.

Civilization started off with commodities, like grain and olive oil and tin. They are fungible . The material itself is the offering.

Next came goods, invented and manufactured products, which are tangible. The product is the offering.

Then comes the service economy, where you add more value by performing an activity on behalf of someone. The value becomes intangible. The operation and procedures are the offering. Starbucks finds the best arabica beans, grinds, tamps and serves you your perfect Cafe Mocha with a caramel swirl. GE offers financing and maintenance contracts with their jet engines.

So far so normal, as these cover the major categories in national accounts and economic statistics, even if the service sector is much more sketchily covered by data. We largely live in a service economy.

The next level, and the book's distinct contribtution is where companies need to go next, - providing experiences. Experiences are memorable. The event is the offering. It is about engaging the customer.

The focus is on the experience customers have while using the good, not the features of the good itself (which sounds very like a key to Apple's success). It is about developing scripts for an encounter, and it borrows a lot from the theater. Experiences are staged. They can be entertainment. esthetic, educational or escapist, depending on the degree of immersion and active participation.

That leads off into a number of rather unpersuasive chapters about how companies can learn from the theater, which get quite tiresome.

They conclude by arguing there is one stage beyond experiences, which do in fact have some weaknesses. Companies like Rain Forest Cafe which stressed an immersive experience around the food found it hard to get repeat business. Once was enough for many people, who looked for the next novelty.

The next and final stage in the progress of economic value is transformations which are about changing individuals permanently.

When you customize an experience to make it just right for an individual- providing exactly what he or she needs right now - you cannot help changing that individual. (p165)

The individual him- or her-self is the offering, rather than a product or an event.

It is all about guidance, and crucially dependent on new aims and purposes and perseverance. This is where the highest economic value can be created. Even management consultancies realize it is no longer enough to sell a service, but they have to achieve a permanent transformation for their clients.

If services are about charging for activities you execute and experiences are about charging for the time customers spend with you, then transformations are about charging for demonstrated outcomes.

Nothing is more important, more abiding or more wealth-creating than the wisdom to transform customers. And nothing will command as high a price. (p190)

They quote Virginia Postrel:

We are , in fact, living more and more in an intangible economy, in which the greatest sources of wealth are not physical. We aren't yet used to an economy in which beauty, amusement attention, learning, pleasure, even spiritual fulfilment are as real and economically valuable as steel or semiconductors. (p187)

I find much of what they say illuminating and persuasive. G and I spent over $400 on dinner at Le Bernardin earlier this year - a hundred times what it would cost us to eat at home. And we felt we got good value because it was a very memorable experience. We will talk about and remember it for years to come. We weren't really thinking of the price, but the fact it was a peak experience.

But we wouldn't go to Le Bernardin every day. And it will be a long time before we go back, if ever - because there are so many other spellbinding dining experiences to try first, not to mention all the places we want to go and things we want to do. You can't run an economy and employ millions of people on the basis of running one of the ten best restaurants in the world, or similar extraordinary experiences.

What's more, many of the best experiences are free, or close to it. Natural beauty, friends, family, looking at art. The cost of entertainment and stimulation tends to get lower over time, even if total spending as a proportion of income on those categories rise.

The book argues that "The history of economic progress consists of charging a fee for what was once free." (p67). I just don't think this is true. Yes, people are more likely to hire a plumber now for specialist activity. But they are more likely to carry out many activities themselves - painting the wall, booking their flights to Miami on Expedia, or figuring out why the router won't work because it avoids hours on the phone to tech support.

The education process itself may get automated and commoditized with technology, at least for standard offerings. You may not be able to automate Harvard or Oxford. The business course at the local community college - maybe.

I completely agree with their "progression of economic value" model. The problem is that the higher levels aren't necessarily more expensive. You could argue theater itself, their paradigmatic experience. has become commoditized compared to a hundred years ago, when there are two hundred channels of drama on Time Warner Cable and several thousand movies on Netflix. People will pay a lot for peak experiences, like the Royal Shakespeare Company or seeing Les Mis on Broadway. But for ordinary experiences they'll just hit the remote control and see what ABC has on.

The highest stage, transformation, also sounds very much like the traditional role of education and the churches - which have not traditionally been associated with automatic wealth (although, granted, the selling of indulgences was a cunning move).

All that said, it is one of the most persuasive books I've read about where future sources of value lie as the economy evolves away from basic goods and services. But these new stages of economic value may not actually employ many people.

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