The Experience Economy (Updated Edition)

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The Experience Economy (Updated Edition) Page 4

by B Joseph Pine II


  Services

  Services are intangible activities customized to the individual request of known clients. Service providers use goods to perform operations on a particular client (such as haircuts or eye exams) or on his property or possessions (such as lawn care or computer repair). Clients generally value the benefits of services more highly than the goods required to provide them. Services accomplish specific tasks clients want done but do not want to do themselves; goods merely supply the means.

  Just as gray areas lie between commodities and goods (extensive processing or refining may merge into making), the line between goods and services can be blurry. Even though restaurants deliver tangible food, for example, economists place them in the service sector because they do not inventory their offerings but deliver them on demand in response to an individual patron's order. Although fast-food restaurants that make the food in advance share fewer of these attributes and so lie closer to the realm of goods than others, economists rightly count those employed at McDonald's, for instance, in the service sector.

  While employment continues to shift to services, output in the commodity and goods sectors has not abated. Today, fewer farmers harvest far more than their ancestors ever conceived possible, and the sheer quantity of goods rolling off assembly lines would shock even Adam Smith. Thanks to continued technological and operational innovations, extracting commodities from the ground and making goods in factories simply require a diminishing number of people. Still, the percentage of gross domestic product (GDP) devoted to the service sector today dwarfs the other offerings. After fearing for many years the hollowing of the U.S. industrial base, most pundits now recognize it as a positive development that the United States, along with most advanced countries, has shifted full-bore to a Service Economy.

  With this shift comes another little-realized or -discussed dynamic: In a Service Economy, individuals desire service. Whether consumers or businesses, they scrimp and save on goods (buying at Walmart, squeezing suppliers) in order to purchase services (eating out, managing the company cafeteria) they value more highly. That's precisely why many manufacturers today find their goods commoditized. In a Service Economy, the lack of differentiation in customers' minds causes goods to face the constant price pressure indelibly associated with commodities. As a result, customers more and more purchase goods solely on price and availability.

  To escape this commoditization trap, manufacturers often deliver services wrapped around their core goods. This provides fuller, more complete economic offerings that better meet customer desires.15 So automakers, for example, increase the coverage and length of their warranties while financing and leasing cars, consumer goods manufacturers manage inventory for grocery stores, and so forth. Initially, manufacturers tend to give away these services to better sell their goods. Many later realize that customers value the services so highly that the companies can charge separately for them. Eventually, astute manufacturers shift away from a goods mentality to become predominantly service providers.

  Look at IBM. In its heyday in the 1960s and 1970s the hardware manufacturer's well-earned slogan was “IBM Means Service,” as it lavished services—at no cost—on any company that would buy its hardware goods. It planned facilities, programmed code, integrated other companies' equipment, and repaired its own machines so prodigiously as to overwhelm nearly all competitors. But as time went on and the industry matured, customer demand for service (not to mention the Justice Department suit that forced IBM to unbundle its hardware and software) surpassed the company's ability to give it away, and it began to charge explicitly for its services. Company executives eventually discovered that the services it once provided for free were, in fact, its most valued offerings. Today, with its mainframe computers long since commoditized, IBM's Global Services unit grows at double-digit rates. The company no longer gives away its services to sell its goods. Indeed, the deal is reversed: IBM buys its clients' hardware when they contract with Global Services to manage their information systems. IBM still manufactures computers, but it's now in the business of providing services.

  Buying goods to sell services—or at least giving them away below cost or for nothing, as mobile phone operators do—signifies that the Service Economy has reached a level once thought unimaginable and, by many, undesirable. Not very long ago academics and pundits still decried the takeover by services as the engine of economic growth, asserting that no economic power could afford to lose its industrial base and that an economy based overwhelmingly on services would become transient, destined to lose its prowess and its place among nations. That concern is now obviously unfounded. In fact, only the shift to services allowed for continued prosperity in the face of the ever-increasing automation of commoditized goods.

  The dynamic continues. The commoditization trap that forced manufacturers to add services to the mix now attacks services with a similar vengeance. Telephone companies sell long-distance service solely on price, price, price. Airplanes resemble cattle cars, with a significant number of passengers flying on free awards; in a last-ditch effort, airlines consolidate, and nickel-and-dime customers for ancillary services, to maintain profitability. Fast-food restaurants all stress “value” pricing; few have managed to avoid offering a “dollar menu.” (Interestingly, the Economist created the Big Mac Index to compare the price levels in different countries based on the price of a local Big Mac.16 Perhaps a new metric should measure the number of items now available for a mere buck.) And price wars abound in the financial services industry as first discount and then Internet-based brokers constantly drive down commissions, charging as little as $3 for what a full-service broker would charge more than $100. J. Joseph Ricketts, founder of Ameritrade, even told BusinessWeek, “I can see a time when, for a customer with a certain size margin account, we won't charge commissions. We might even pay a customer, on a per trade basis, to bring the account to us.”17 An absurdity? Only if one fails to recognize that any shift up to a new, higher-value offering entails giving away the old, lower-value offering.

  Indeed, the Internet is the greatest known force of commoditization for goods as well as services. It eliminates much of the human element in traditional buying and selling. Its capability for friction-free transactions enables instant price comparisons across myriad sources. And its ability to quickly execute these transactions allows customers to benefit from time as well as cost savings. With time-starved consumers and speed-obsessed businesses, the Internet increasingly turns transactions for goods and services into a virtual commodity pit.18 Web-based enterprises busy commoditizing both consumer and business-to-business industries include specialty commoditizers—such as CarsDirect.com (automobiles), compare.net (consumer electronics), getsmart.com (financial services), insweb.com (insurance), and priceline.com (airline travel)—and general commoditizers that help buyers find lower prices for virtually all goods and services, such as bizrate.com, netmarket.com, NexTag.com, pricegrabber.com, and mySimon.com, to name a few. Consider, too, the ease with which consumers can perform such commoditizing tasks as finding used books via Amazon.com or searching for items via Google. And of course newspaper classified ads, the once dominant means for price- conscious consumers to find low-cost secondhand items, now have unprecedented competition from the commoditizing presence of eBay and CraigsList.

  The other great force of commoditization? Walmart. That is the $400 billion behemoth's entire modus operandi, accomplished by squeezing its suppliers, increasing its package sizes, enhancing its logistics—whatever it takes to lower the costs of the goods it sells. Note, too, that Walmart increasingly sells services, beginning with food and photographic services but now encompassing optometric, financial, and healthcare services and becoming a force for commoditization in that sector as well.

  Service providers also face another adverse trend unknown to goods manufacturers: disintermediation. Companies such as Dell, USAA, and Southwest Airlines generally sidestep retailers, distributors, and agents to connect directly with the
ir end buyers. Decreased employment in these intermediaries, as well as bankruptcies and consolidations, invariably results. And a third trend further curtails service sector employment: that old boogeyman automation, which today hits many service jobs (telephone operators, bank clerks, and the like) with the same force and intensity that technological progress hit employment in the goods sector during the twentieth century. Even professional service providers increasingly discover that their offerings have been “productized”—embedded into software, such as tax preparation programs.19 Or they have been offshored to India, as with manufacturing moving to China, in what amounts to a fourth force of commoditization.

  All this points to an inevitable conclusion: the Service Economy has peaked. A new economy has arisen to increase revenues and create new jobs, one based on a distinct kind of economic output. Goods and services are no longer enough.

  Experiences

  Experiences have necessarily emerged to create new value. Such experience offerings occur whenever a company intentionally uses services as the stage and goods as props to engage an individual. Whereas commodities are fungible, goods tangible, and services intangible, experiences are memorable. Buyers of experiences—we'll follow Disney's lead and call them guests—value being engaged by what the company reveals over a duration of time. Just as people have cut back on goods to spend more money on services, now they also scrutinize the time and money they spend on services to make way for more memorable—and more highly valued—experiences.

  The company—we'll call it an experience stager—no longer offers goods or services alone but the resulting experience, rich with sensations, created within each customer. All prior economic offerings remain at arm's length, outside the buyer, but experiences are inherently personal. They actually occur within any individual who has been engaged on an emotional, physical, intellectual, or even spiritual level. The result? No two people can have the same experience—period. Each experience derives from the interaction between the staged event and the individual's prior state of mind and being.

  Even so, some observers might argue that experiences are only a subclass of services, merely the latest twist to get people to buy certain services. Interestingly, the esteemed Adam Smith made the same argument about the relationship between goods and services more than two hundred years ago in The Wealth of Nations. He regarded services almost as a necessary evil—what he called “unproductive labour”—and not as an economic offering in itself, precisely because services cannot be physically inventoried and therefore create no tangible testament that work has been done. Smith did not limit his view of unproductive activity to such workers as household servants. He included the “sovereign” and other “servants of the public,” the “protection, security, and defence of the commonwealth,” and a number of professionals (“churchmen, lawyers, physicians, men of letters of all kinds”) whose efforts the current market has determined to be of far more value than that of most laborers. Smith then singled out the experience stagers of his day (“players, buffoons, musicians, opera-singers, opera-dancers, &c.”) and concluded, “The labour of the meanest of these has a certain value, regulated by the very same principles which regulate that of every other sort of labour; and that of the noblest and most useful, produces nothing which could afterwards purchase or procure an equal quantity of labour. Like the declamation of the actor, the harangue of the orator, or the tune of the musician, the work of all of them perishes in the very instant of its production.”20 However, even though the work of the experience stager perishes with its performance (precisely the right word), the value of the experience lingers in the memory of any individual who was engaged by the event.21 Most parents do not take their kids to Walt Disney World only for the venue itself but rather to make the shared experience part of everyday family conversations for months, or years, afterward.

  Although experiences themselves lack tangibility, people greatly desire them because the value of experiences lies within them, where it remains long afterward. That's why the studies performed by Cornell psychology professors Travis Carter and Thomas Gilovich determined that buying experiences makes people happier, with a greater sense of well-being, than purchasing goods.22 Similarly, the Economist summarized recent economic research into happiness as “‘experiences’ over commodities, pastimes over knick-knacks, doing over having.”23

  Companies that create such happiness-generating experiences not only earn a place in the hearts of consumers but also capture their hard-earned dollars—and harder-earned time. The notion of inflation as purely the result of companies passing along increased costs is not valid; higher prices also indicate greater value, especially in the way people spend their time. The shift in consumer (and business) demand from commodities to goods to services and now to experiences shifts the prototypical “market basket” to these higher-valued offerings—more than government statisticians take into account, we believe. In 2009, barely 60 percent of the total Consumer Price Index (CPI) was in services, which weren't even included in the Producer Price Index until 1995.24 But if we examine the CPI statistics, as shown in figure 1-2, we see that the CPI for goods (using new vehicles, the prototypical Industrial Economy product) increases less than the CPI for services, which in turn increases less than the CPI for the one prototypical experience that can be found in the statistics: admissions to recreational events such as movies, concerts, and sports, which the government began tracking separately only in 1978.25 Note, too, the volatility of the CPI for a typical commodity, pork, relative to the other offerings. Increased price volatility as pure market forces take over awaits the sellers of all commoditized goods and seravices.26 (Pork actually surpasses new vehicles in these statistics because of not only its own volatility but also the increasing price pressure on the commoditizing automobile industry over the past decade or two while it simultaneously increased quality, which the government discounts in any price increases. We suspect these lines will once again cross.) Companies that stage experiences, on the other hand, increase the price of their offerings much faster than the rate of inflation because consumers value experiences more highly.

  Figure 1-2: Consumer Price Index (CPI) by economic offering

  Source: U.S. Bureau of Labor Statistics; Lee S. Kaplan, Lee3Consultants.com.

  The employment and nominal GDP statistics show the same effect as the CPI, as figure 1-3 makes clear.27 In the fifty-year period 1959–2009, commodity output produced in the United States increased by a compound annual growth rate (CAGR) of 5.2%, while employment in commodity industries actually decreased. Manufacturing output increased only slightly more than commodity output, while also losing jobs on average every year, albeit only slightly (although the relative number of people employed in the manufacturing sector decreased greatly in the past fifty years). Services overpowered these sectors with a 2.0 percent CAGR in employment and more than 7 percent in GDP. But those industries (or portions) that could be pulled out of the government's service sector statistics as experiential grew even faster: 2.2 percent employment and 7.5 percent GDP.28

  Figure 1-3: Growth in employment and nominal gross domestic product (GDP) by economic offering

  Source: U.S. Bureau of Economic Analysis; Strategic Horizons LLP; and Lee S. Kaplan, Lee3Con-sultants.com analysis.

  No wonder many companies today wrap experiences around their existing goods and services to differentiate their offerings. Service providers may have an edge in this regard, because they are not wedded to tangible offerings. They can enhance the environment in which clients purchase or receive the service, layer on inviting sensations encountered while in that company-controlled environment, and otherwise figure out how to better engage clients to turn the service into a memorable event.

  Ing the Thing

  What's a manufacturer to do? Short of leapfrogging into the experience business—quite a stretch for most diehard manufacturers—manufacturers must focus on the experience customers have while using their goods.29 Most product design
ers focus primarily on the internal mechanics of the good itself: what it does. What if the attention centered instead on the individual's use of the good? The focus would then shift to the user: how the individual experiences the using of the good.

  Notice, for example, the diverse set of experiences highlighted in a travel guide from Fodor's Travel Publications, an “escapist scrapbook” featuring the photography and essays of Peter Guttman. In Adventures to Imagine, Guttman documents twenty-eight adventures in which potential travelers can immerse themselves. Consider the range of activities—some old, some new, but all engaging: houseboating, portaging, mountain biking, cattle driving, bobsledding, tall ship sailing, tornado chasing, canyoneering, wagon training, seal viewing, iceberg tracking, puffin birding, race car driving, hot-air ballooning, rock climbing, spelunking, white-water rafting, canoeing, heli-hiking, hut-to-hut hiking, whale kissing, llama trekking, barnstorming, land yachting, historic battle reenacting, iceboating, polar bearing, and dogsledding.30 Companies constantly introduce new ing experiences to the outdoor adventure world. Just to add a few to the list: cross-golfing and guerilla-golfing (golfing without a golf course, playing instead in undeveloped rural terrains or abandoned urban settings, respectively), noboarding (snowboarding on boards that lack bindings), canyoning (bodysurfing in rapid mountain streams, usually in Switzerland or New Zealand) or riverboarding (with more protective gear in larger rapids), and glacier-walking (in places like Norway).

 

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