Consider, however, a true commodity: the coffee bean. Companies that harvest coffee or trade it on the futures market receive—at the time of this writing—a little more than 75 cents per pound, which translates into 1 or 2 cents a cup. When a manufacturer roasts, grinds, packages, and sells those same beans in a grocery store, turning them into a good, the price to a consumer jumps to between 5 and 25 cents a cup (depending on brand and package size). Brew the ground beans in a run-of-the-mill diner, quick-serve restaurant, or bodega, and that coffee-making service now sells for 50 cents to a dollar or so per cup.
So depending on what a business does with it, coffee can be any of three economic offerings—commodity, good, or service—with three distinct ranges of value customers attach to the offering. But wait: serve that same coffee in a five-star restaurant or a cafe such as Starbucks—where the ordering, creation, and consumption of the cup embody a heightened ambience or sense of theatre—and consumers gladly pay $2 to $5 a cup. Businesses that ascend to this fourth level of value (see figure 1-1) establish a distinctive experience that envelops the purchase of coffee, increasing its value (and therefore its price) by two orders of magnitude over the original commodity.
Figure 1-1: Price of coffee offerings
Or more. Immediately upon arriving in Venice, a friend of ours asked a hotel concierge where he and his wife could go to enjoy the city's best. Without hesitation he directed them to the Caffé Florian in St. Mark's Square. The two of them were soon at the cafe in the crisp morning air, sipping cups of steaming coffee, fully immersed in the sights and sounds of the most remarkable of Old World cities. More than an hour later, our friend received the bill and discovered the experience had cost more than $15 a cup. “Was the coffee worth it?” we asked. “Assolutamente!”
A New Source of Value
Experiences are a fourth economic offering, as distinct from services as services are from goods, but one that has until now gone largely unrecognized. Experiences have always been around, but consumers, businesses, and economists lumped them into the service sector along with such uneventful activities as dry cleaning, auto repair, wholesale distribution, and telephone access. When a person buys a service, he purchases a set of intangible activities carried out on his behalf. But when he buys an experience, he pays to spend time enjoying a series of memorable events that a company stages—as in a theatrical play—to engage him in an inherently personal way.
Experiences have always been at the heart of entertainment offerings, from plays and concerts to movies and TV shows. Over the past few decades, however, the number of entertainment options has exploded to encompass many, many new experiences. We trace the beginnings of this experience expansion to one man and the company he founded: Walt Disney. After making his name by continually layering new levels of experiential effects on to cartoons (he innovated synchronized sound, color animation, three-dimensional backgrounds, stereophonic sound, audio- animatronics, and so forth), Disney capped his career in 1955 by opening Disneyland—a living, immersive cartoon world—in California. Before his death in 1966, Disney had also envisioned Walt Disney World, which opened in Florida in 1971. Rather than create another amusement park, Disney created the world's first theme parks, which immerse guests (never “customers” or “clients”) in rides that not only entertain but also involve them in an unfolding story. For every guest, cast members (never “employees”) stage a complete production of sights, sounds, tastes, aromas, and textures to create a unique experience.1 Today, The Walt Disney Company carries on its founder's heritage by continually “imagineering” new offerings to apply its experiential expertise, from TV shows on the Disney Channel to “character worlds” at Disney.com, from Broadway shows to the Disney Cruise Line, complete with its own Caribbean island.
Whereas Disney used to be the only theme park proprietor, it now faces scores of competitors in every line of business, both traditional and experimental. New technologies encourage whole new genres of experience, such as video games, online games, motion-based attractions, 3-D movies, virtual worlds, and augmented reality. Desire for ever greater processing power to render ever more immersive experiences drives demand for the goods and services of the computer industry. Former Intel chairman (now senior adviser) Andrew Grove anticipated the explosion of technology-enabled offerings in a mid-1990s speech at the COMDEX computer show (itself an experience), when he declared, “We need to look at our business as more than simply the building and selling of personal computers [that is, goods]. Our business is the delivery of information [that is, services] and lifelike interactive experiences.” Exactly.
Many traditional service industries, now competing for the same dollar with these new experiences, are themselves becoming more experiential. At theme restaurants such as Benihana, the Hard Rock Cafe, Ed Debevic's, Joe's Crab Shack, and the Bubba Gump Shrimp Co., the food functions as a prop for what's known in the industry as an “eatertainment” experience. And stores such as Build-A-Bear Workshop, Jordan's Furniture, and Niketown draw consumers through fun activities and promotional events (sometimes called “entertailing,” or what The Mills Corp. trademarked as “shoppertainment”).
But this doesn't mean that experiences rely exclusively on entertainment; as we explain fully in chapter 2, entertainment is only one aspect of an experience. Rather, companies stage an experience whenever they engage customers, connecting with them in a personal, memorable way. Many dining experiences have less to do with the entertainment motif than with the merging of dining with comedy, art, history, or nature, as happens at such restaurants as Teatro ZinZanni, Café Ti Tu Tango, Medieval Times, and the Rainforest Cafe, respectively.2 In each place, the food service provides a stage for layering on a larger feast of sensations that resonate with consumers. Retailers such as Jungle Jim's International Market, The Home Depot, and the Viking Cooking School offer tours, workshops, and classes that combine shopping and education in ways that we can rightly describe as “edutailing” or “shopperscapism.”
The “commodity mindset,” according to former British Airways chairman Sir Colin Marshall, means mistakenly thinking “that a business is merely performing a function—in our case, transporting people from point A to point B on time and at the lowest possible price.” What British Airways does, he continued, “is to go beyond the function and compete on the basis of providing an experience.”3 The company uses its base service (the travel itself ) as a stage for a distinctive en route experience, one that gives the traveler a respite from the inevitable stress and strain of a long trip.
Even the most mundane transactions can be turned into memorable experiences. Standard Parking of Chicago plays a signature song on each level of its parking garage at O'Hare Airport and decorates walls with icons of a local sports franchise—the Bulls on one floor, the Blackhawks on another, and so forth. As one Chicago resident told us, “You never forget where you parked!” Trips to the grocery store, often a burden for families, become exciting events at places such as Bristol Farms Gourmet Specialty Foods Markets in Southern California. This upscale chain “operates its stores as if they were theatres,” according to Stores magazine, featuring “music, live entertainment, exotic scenery, free refreshments, a video-equipped amphitheater, famous-name guest stars and full audience participation.”4 Russell Vernon, owner of West Point Market in Akron, Ohio—where fresh flowers decorate the aisles, restrooms feature original artwork, and classical music wafts down the aisles—describes his store as “a stage for the products we sell. Our ceiling heights, lighting and color create a theatrical shopping environment.”5 Grocers such as The Fresh Market and Whole Foods Markets replicate these local food experiences and scale them on a regional and national basis, respectively.
Consumers aren't the only ones to appreciate such experiences. Businesses are made up of people, and business-to-business settings also present stages for experiences. A Minneapolis-based computer installation and repair firm first dubbed itself the Geek Squad in 1994 and began focusing on ho
me-office and small business customers. With its special agents costumed in white shirts with thin black ties, carrying badges, and driving black-and-white Beetles, called Geekmobiles, painted like squad cars, the company turns mundane services into truly memorable encounters. Today the “24-Hour Computer Support Task Force” employs more than twenty-four thousand agents as part of Best Buy. Costumed entrepreneurs in other industries followed suit, such as a garbage collector calling itself the Junk Squad (“Satisfaction Guaranteed or Double Your Junk Back”). Many companies hire theatre troupes to turn otherwise ordinary meetings into improvisational events. Minneapolis-based LiveSpark (formerly Interactive Personalities, Inc.), for example, stages rehearsed plays and “spontaneous scenes” for corporate customers, engaging audience members in a variety of ways, including computer-generated characters that interact in real time.6
Business-to-business marketers increasingly orchestrate events at elaborate venues to pitch prospects. Scores of B2B companies turn mundane conference rooms into experiential “executive briefing centers”—and some go beyond that, such as Johnson Controls' Showcase in Milwaukee, where the company plunges business guests into a power outage to show off its products in action. Steelcase recently launched a venue called WorkSpring, the first one in Chicago, offering unique office space so that corporate guests experience furniture in actual meetings before making purchasing decisions. TST, Inc., an engineering firm in Fort Collins, Colorado, gutted its office to create the TST Engineerium, a place for staff to host “visioneering experiences” for its land development customers. Autodesk, Inc., developers of engineering and design software, curates the Autodesk Gallery at One Market in San Francisco as a place to showcase clients' use of its technology in innovative design projects (and opens the B2B interactive art exhibition to the general public every Wednesday afternoon). One B2B experience takes place outdoors: the Case Tomahawk Customer Experience Center in the Northwoods of Wisconsin. Prospective buyers play in a giant sandbox with large construction equipment—bulldozers, backhoes, cherry pickers, and the like—as part of the selling process.
Valuable Distinctions
The foregoing examples—from consumer to business customer, theme restaurant to computer support task force—only hint at the newfound prominence of such experiences within the U.S. economy and, increasingly, those of other developed nations as well. They herald the still emerging Experience Economy.
Why now? Part of the answer lies with technology, which powers many experiences, and part with increasing competitive intensity, which drives the ongoing search for differentiation. But the most encompassing answer resides in the nature of economic value and its natural progression—like that of the coffee bean—from commodity to good to service and then to experience. An additional reason for the rise of the Experience Economy is, of course, rising affluence over time. Economist Tibor Scitovsky notes that “man's main response to increasing affluence seems to be an increase in the frequency of festive meals; he adds to the number of special occasions and holidays considered worthy of them and, ultimately, he makes them routine—in the form, say, of Sunday dinners.”7 The same is true of experiences we pay for. We are going out to eat more frequently at increasingly experiential venues, and even drinking “festive” types of coffee. As summarized in table 1-1, each economic offering differs from the others in fundamental ways, including just what, exactly, it is. These distinctions demonstrate how each successive offering creates greater economic value. Often a manager claims a company is “in a commodity business” when in fact the offering sold is not a true commodity. The perception results in part from a self-fulfilling commoditization that occurs whenever an organization fails to fully recognize the distinctions between higher-value offerings and pure commodities. (And if an analyst or pundit says your company sells a commodity when you don't, you have been insulted, as well as challenged to shift up to a higher level in economic value.) If you fear that your offerings are being commoditized, read the simple descriptions given next. And if you think your offerings could never be commoditized—think again. A haughty spirit goes before a great fall (in prices).
Table 1-1: Economic distinctions
Economic offering
Commodities
Goods
Services
Experiences
Economy
Agrarian
Industrial
Service
Experience
Economic function
Extract
Make
Deliver
Stage
Nature of offering
Fungible
Tangible
Intangible
Memorable
Key attribute
Natural
Standardized
Customized
Personal
Method of supply
Stored in bulk
Inventoried after production
Delivered on demand
Revealed over a duration
Seller
Trader
Manufacturer
Provider
Stager
Buyer
Market
User
Client
Guest
Factors of demand
Characteristics
Features
Benefits
Sensations
Commodities
True commodities are materials extracted from the natural world: animal, mineral, vegetable. People raise them on the ground, dig for them under the ground, or grow them in the ground. After slaughtering, mining, or harvesting the commodity, companies generally process or refine it to yield certain characteristics and then store it in bulk before transporting it to market. By definition, commodities are fungible—they are what they are and therefore interchangeable. Because commodities cannot be differentiated, commodity traders sell them largely into nameless markets where a company purchases them for a price determined by supply and demand. (Companies do of course supply gradations in categories of commodities, such as different varieties of coffee beans or different grades of oil, but within each grade the commodity is purely fungible.) Every commodity trader commands the same price as everyone else selling the same stuff, and when demand greatly exceeds supply, handsome profits ensue. When supply outstrips demand, however, profits prove hard to come by. Over the short term, the cost of extracting the commodity bears no relationship to its price, and over the long term the invisible hand of the market determines the price as it encourages companies to move in or out of commodity businesses.
Agricultural commodities formed the basis of the Agrarian Economy, which for millennia provided subsistence for families and small communities. When the United States was founded in 1776, more than 90 percent of the employed population worked on farms. In 2009, that number had dropped to 1.3 percent.8
What happened? The tremendous technological and productivity improvements that became known as the Industrial Revolution drastically altered this way of life, beginning on the farm but quickly extending into the factory (such as the pin-making factory made famous by Adam Smith in The Wealth of Nations, published, coincidentally, in 1776). Building on the success of companies in England from the 1750s onward, flourishing U.S. factories developed their own production innovations that in the 1850s collectively became known as the American System of Manufactures.9 As manufacturers the world over learned and copied these techniques, automating millions of craft jobs in the process, the foundation for all advanced economies irrevocably shifted to goods as farm employment plummeted.
Goods
Using commodities as their raw materials, companies make and then inventory goods—tangible items sold to largely anonymous customers who buy them off the shelf, from the lot, out of the catalog, or on the Web. Because manufacturing processes actually convert the raw materials in making a variety of goods, leeway exists to set prices based on the costs of production as well as product differentiation. Signif
icant differences exist in the features of various makes of automobiles, computers, soft drinks, and, to some degree, even lowly pins. And because they can be put to immediate use—to get places, write reports, quench thirsts, fasten things together—their users value them more highly than the commodities from whence they came.
Although people have turned commodities into useful goods throughout history, the time-intensive means of extracting commodities and the high-cost methods of craft-producing goods long prevented manufacturing from dominating the economy.10 This changed when companies learned to standardize goods and gain economies of scale. People left the farm in droves to work in factories, and by the 1880s the United States had overtaken England as the world's leading manufacturer.11 With the advent of Mass Production, brought about in the first assembly line at Henry Ford's Highland Park, Michigan, plant on April 1, 1913, the United States solidified its position as the number one economic power in the world.12
As continued process innovations gradually reduced the number of workers required to produce a given output, the need for manufacturing workers leveled off and eventually began to decline. Simultaneously, the vast wealth generated by the manufacturing sector, as well as the sheer number of physical goods accumulated, drove a greatly increased demand for services and, as a result, service workers. It was in the 1950s, when services first employed more than 50 percent of the U.S. population, that the Service Economy overtook the Industrial (although this was not recognized until long after the fact). In 2009, manufacturing jobs—people actually making things with their hands—employed a mere 10 percent of the working population.13 With farming employing 1.3 percent, what economists today categorize as services makes up almost 90 percent of U.S. workers. Globally, service jobs recently eclipsed agricultural ones for the first time in human history: some 42 percent of worldwide workers find employment in the service sector, 36 percent in agriculture, and only 22 percent in manufacturing.14 (Of course, these statistics, from the United Nations International Labour Organization, fail to distinguish those working in experience-staging employment; so the service sector figure includes experience-staging jobs as well.)
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