At the café Le Train Bleu in Paris's Gare de Lyon, a demitasse of espresso isn't what the French call bon marché. At approximately $8 for a 2-ounce shot (there's no extra charge for the sugar cubes or the morsel of dark chocolate served on the side), the fancy price might make frugal tourists do a doubletake. But café patrons are paying for more than the coffee in the porcelain cup. As they relax in opulent leather couches and gaze at Rococo-style paintings worthy of the Louvre, they receive a taste of Belle Époque Paris. The coffee itself may not take long to drink, but the experience of sipping the beverage in such an ornate setting will leave an indelible impression on patrons' minds, one that can be worth far more than the $8 price.
Or so, at least, argues B Joseph Pine II, cofounder of Aurora, Ohio-based consultancy Strategic Horizons LLP and co-author with James H Gilmore of The Experience Economy: Work Is Theatre & Every Business a Stage (Harvard Business School Press, 1999). Pine predicts that in order to stay competitive, businesses will soon be forced to wrap experiences like the one offered at Le Train Bleu around their traditional products and services.
Those that fail will find their offerings devolving into commodities - undifferentiated by brand or features and yielding little, if any, profit. In fact, Pine maintains that there is already a market for experiences and points to the popularity of theme restaurants like the Hard Rock Cafe and the proliferation of experiential retail stores like NikeTown as evidence of this trend.
At a time when businesses are placing increased emphasis on customer-focused strategies, Pine's ideas are compelling. Indeed, since it was published in April 1999, The Experience Economy has been widely reviewed in the business and general press alike, including such publications as Business Week, Forbes, The New York Times and USA Today. I spoke with Pine about the forces that are shaping the experience economy and what CIOs can do to prepare for it.
CIO: What are experiences, and how are they different from services?
Pine: Experiences are memorable events revealed over a duration of time that engage individuals in an inherently personal way, while services are mundane and mass-produced on demand. Experiences are built on top of services in the same way that services are built on top of goods. A service becomes an experience when it is personalised because customising a service makes it memorable. An experience becomes its own economic offering when a company charges a customer admission or a subscription fee for the time he spent with that company on its experience. The value that is created by an experience is the person's internal reaction. Experiences have always been around, it's just that now we're beginning to recognise them as a distinct economic offering.
There are four basic kinds of experiences - entertaining, educational, escapist and aesthetic - but the best ones actually encompass aspects of all four. Entertainment is just one way to engage a customer. An example of this is the Forum Shops in Las Vegas, where all of the stores are laid out on streets that look like an old Roman marketplace. Every hour there is a five- or 10-minute staged production - like a re-creation of the drowning of Atlantis or a parade of Roman centurion guards - to captivate the audience of shoppers. Despite the fact that five or 10 minutes of every hour are basically lost, with no shopping done, the Forum Shops earn by far the highest dollar amount per square foot, three or four times that of the typical mall.
There are also educational experiences, where the customer absorbs the events unfolding before him. Unlike entertainment, which passively engages an individual, education requires that he actively participate in the event in order to increase his knowledge or skills. An example of this is the Diamond Exchange, a thrice-yearly gathering of executives presented by Diamond Technology Partners, a consulting firm in Chicago. The primary focus of the Diamond Exchange is the educational experience: [Through discussions with their peers], people learn about what's going on with the Internet and how they should create a digital strategy.
Then there are escapist experiences, where the guest is completely immersed and actively involved in shaping the experience. This could be like a trip to a casino, a ski vacation or a virtual-reality experience.
Finally, there are aesthetic experiences like going to the Grand Canyon or the Metropolitan Museum of Art. Customers are immersed in an environment, but because they are passively involved they have little or no effect on it, leaving it essentially untouched.
Why is the experience economy happening now?
Pine: It's a natural progression of economic value. Just as we moved from an industrial economy to a service-based economy in the 1950s, today we're moving to an experience economy. In the service economy, goods became commoditised and undifferentiated. Customers no longer cared who made them or what their features were. They only cared about three factors: price, price and price. Manufacturers have had to surround their goods with services [to differentiate their offerings from those of their competitors]. In the same way, services are now becoming commoditised. Long-distance telephone service is sold on price, price, price.
The Internet is another factor. The Internet is the greatest force of commoditisation ever known to man. The 'friction-free economy' means that customers can instantly compare prices among multiple vendors. It focuses them on getting the lowest possible price, which is going to drive prices down to marginal costs. If people can buy goods at the cheapest possible price on the Internet, the only thing that's going to draw them to a store is an enhanced shopping experience. So on the supply side, in order to survive and differentiate, both manufacturers and service providers have to begin adding experiences to their offerings and charging for the experience they provide.
America Online is an example of a company that charges explicitly for the time you spend online. It's like an admission fee for the Web. An Internet service provider needs to think that it is providing more than just access, that it's providing an online experience like AOL, linking users to chat rooms and shopping.
On the demand side, we are becoming a time-starved nation. People are working longer and harder and have more disposable income, which means that rather than relying on their own resources, they are more willing to pay somebody else to take care of their needs. We used to be responsible for all of our own services, like cooking, but now going out to eat is commonplace.
We used to change the oil in our cars, and now we pay someone to do that. The entire history of economic progress is one of charging a fee for what once was free. In the same way, where we used to be responsible for our own experiences, we now pay other people to stage those experiences for us.
But don't you think there will always be a demand simply for products?
Pine: Absolutely. The demand will always be there for base goods, but they'll either be surrounded by services and experiences or they will be commoditised. One thing you have to understand is that it will take fewer and fewer people to create the things to fulfil a particular demand. For example, at the turn of the century, over 50 per cent of the population was employed in manufacturing. Today that's less than 20 per cent, but manufacturing output continues to skyrocket because of productivity improvements. The same thing is happening with services, which today employ the majority of the population. Over time [as services become automated and commoditised], people [working in the service sector] will move into experiences.
What is an example of a company that is wrapping an experience around its product or service?
Pine: A great example is the Progressive Insurance Group of Ohio, which mass customises both its policies and its claims adjustment process by producing standardised modules of those offerings that can be combined in different ways to suit the needs of its individual members. If a Progressive client has an accident, he can call the company right from where it happened, and Progressive will immediately dispatch a claims adjuster to the accident site.
The first thing the claims adjuster does is make sure that the customer feels all right by giving him a cell phone to call a loved one, a cup of coffee or a place to sit. While the customer is collecting his nerves, Progressive adjusts the claim on the spot. The adjuster has on hand all the information about the customer's policy, car, the places where he can get it fixed and how much it will cost.
In over 95 per cent of the cases, Progressive gives the customer a check on the spot. He is then free to get on with his life instead of having the accident hanging over his head for weeks while another company might try to fit him into its mass production process.
And by the way, Progressive found that it cost a lot less to operate this way. Progressive has taken what was an insurance service and created an assurance experience where they assure the customer by mass customising the service.
The experience economy seems more customer focused. How does this work in a business-to-business context?
Pine: Experiences definitely apply more to consumers, but they're also applicable in a business-to-business setting. What truly makes something an experience is charging admission for the time that your customer spends with you. In a business-to-business context, that basically means getting your customers to pay you to sell to them. It means creating an environment or some sort of system that is so engaging, your customers would gladly pay you to participate in it in order for you to sell them your goods and services.
An example is Silicon Graphics' Visionarium Reality Center in Mountain View, California. The Visionarium functions as a product development site. It's a place to bring customers and developers together in an environment where customers can view, hear, touch or fly through real-time, three-dimensional product development simulations.
What is the CIO's role in the experience economy?
Pine: Companies need to learn how their customers interact with the goods or services that they provide. To that end, CIOs should be implementing technology like e-mail and Web tracking software or kiosks to learn what customers want and to track their preferences. Then they have to get this feedback out to the front line, like the way Amazon.com greets returning visitors by name and provides them with recommendations on its home page.
The Ritz Carlton Hotel is a perfect example of a company in the service industry that offers experiences. The hotel tracks in a database things like whether guests prefer Pepsi or Coke, hypoallergenic pillows, or that they set their radio to a contemporary jazz station rather than a classical station. The next time a guest checks into a room at the Ritz, the housekeeper automatically knows to prepare the room with hypoallergenic pillows and sets the radio to a jazz station.
With each stay, the Ritz learns more about its customers and is able to customise more of its services for a particular guest. Because of the personalisation, the Ritz Carlton transforms a hospitality service into a memorable experience that is revealed over the duration of a guest's stay and subsequent returns.
Beyond that, CIOs need to think creatively about what kind of experience makes sense for their business. The experience needs to fit in with the heritage of the company. In chapter three of The Experience Economy, we outline the design principles for an experience. The first step is to come up with a basic theme - the organising principle for the experience - that the company wants to impart. With the Progressive Insurance example, the theme would be, 'You can get on with your life'.
The next step is to harmonise impressions with positive cues to create those impressions. Impressions are the take-aways from the experience. They're single words that describe the way a person feels after the experience. One impression [with the Progressive example] would be, 'That made me feel cared for'. A cue that you're being cared for is the claims adjuster giving you a place to sit, a cup of coffee and a cell phone in the van.
Companies also need to eliminate negative cues: everything that contradicts or detracts from the theme. A negative cue in the Progressive example would be if the van showed up with a dented fender. This would cause a customer to think, 'How can they take care of me if they can't even repair their own vans?'
In chapter 10 of The Experience Economy, you and Gilmore introduce the transformation economy, the next step beyond the experience economy, where businesses specialise in changing people physically or emotionally. Explain your use of management consulting as an example of an industry in the business of transformation.
Pine: Transformation is a distinct offering built on top of experiences, just as experiences are built on top of services and services on top of goods. What differentiates a transformation from all other economic offerings is that there is follow-through. Transformation ensures customers that they will achieve the results they are looking for. Management consulting is all about changing business customers to give them better results on their bottom line.
Today many consultants are only in the service business. They perform a set of activities and they get paid for those activities whether or not the customer achieves any positive results. CIOs need to insist that consultants provide a transformation, and declare that they won't pay them a full amount until it happens. But this is a two-edged sword. Anything that CIOs demand from consultants they should be prepared to give to their business unit managers internally.
What can CIOs do to ensure that they are keeping up with their peers' demands for tangible results?
Pine: Just as CIOs need to stage experiences to keep external customers, they need to stage experiences for the whole business to keep internal customers. CIOs need to understand the business' or business units' aspirations. What is the business truly trying to achieve and where is it today? Then they need to design a set of experiences that will enable the business to change.
CIOs need to work directly with the unit to draw them into the process of creating an experience that will fulfil its goals. They should create prototypes or arenas [like Silicon Graphics' Visionarium] where people from business units can viscerally experience what life will be like when a certain technology is fully implemented. When designing this prototype, which is not just a prototype of the technology but the environment in which it will be used, CIOs need to take into account the timing [when it makes sense to roll out the system] and how real the prototype should be. For instance, if the prototype is for a retail store, you might not need to re-create the whole store, but you should probably re-create stock keeping units. It just shouldn't seem like a lab environment.
Throughout your book, you suggest that there is a strong moral component to buying and selling experiences and transformations. What ethical issues do CIOs and businesses need to be aware of?
Pine: Drugs and prostitution are just as much a part of the experience economy as theme parks and theme restaurants. You can offer virtuous experiences that help people reach their aspirations, or you can offer deleterious experiences that will actually harm them. You have to be careful about what experience you stage and realise that, for example, just as financial services have a fiduciary responsibility with their clients and their client's money, experience stagers have a custodial responsibility to take care of the people who are undergoing that experience. You need to ensure that the experience you take somebody through does not affect them adversely.
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