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The Experience Economy

Have you ever bought an experience? If you've participated in a q&a session at a conference, gone to a workshop at the Home Depot, or been a regular at a neighborhood bar or restaurant, the answer is yes. In fact, any transaction you've had with a business that involved a personal, memorable connection between you and the business makes you a bonafide member of the experience economy. In their new book, The Experience Economy: Work Is Theatre & Every Business a Stage, Joe Pine and Jim Gilmore, who are interviewed here, describe the inexorable shift away from selling goods and services to staging experiences as the next step in the economy's evolution.
experience economy

Joe Pine and Jim Gilmore believe that the future of business is in the experience sold to customers. In many ways the experience economy is already a large part of our daily activities. No longer confined to movies and theme parks, experiences have seeped into nearly every aspect of our lives. Supermarkets are selling us vegetables — and teaching us how to cook them. Hospital maternity wards look more like health spas. Even houses of worship — perhaps the original proprietors of the transformational experience — are growing savvier about the kind of experiences they deliver to their communities. In this interview, Pine and Gilmore elaborate on the theme and tell why "work is theater" is a viable operating model for business

Most people would say that information is the foundation of the new economy. You argue that it is the deliberate creation of experiences — not information — that is ushering us into a new economic era. Can you explain what you mean by this?

Economic offerings, not forms of intelligence, comprise the substance of buying and selling, and we argue that experiences represent an existing but largely unrecognized form of economic output. It's true of course that experiences have always been around — but consumers, businesses, and economists lump them into the service sector along with such uneventful activities as dry cleaning, auto repair, and telephone access. What's new is that experiences, as economic offerings, occur whenever a company intentionally uses services as the stage and goods as props to engage an individual. New technologies are encouraging whole new genres of experience — forcing companies to rethink what it is they are actually selling. As Intel Chairman Andy Grove remarked at the 1996 Comdex computer show "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 [services] and lifelike interactive experiences." Many traditional service industries, trying to compete with these new experiences, are becoming more experiential themselves, ranging from theme restaurants and stores to airlines and supermarkets.

What signs are pointing to the beginning of this "experience economy?"

The service economy is peaking as many traditional services face commoditization. Fast-food restaurants now all stress "value" pricing; telephone companies sell long-distance service based solely on price. And of course, the Internet is increasingly turning transactions for goods and services into a virtual commodity pit. These and other factors all underscore an unavoidable fact — that goods and services are no longer enough. As more and more professional service jobs become automated (ie: via tools like tax preparation software), the focus of human-to-human interaction in business will shift to experiences. Look what happened when IBM realized decades ago that the services they'd been giving away for free were actually what customers valued most. Today, with its mainframe computers (its goods) long since commoditized, IBM will now buy its clients hardware if they'll contract with the company to service their information systems. In the same way, the transition to the experience economy has begun now that companies are giving away experiences in order to sell existing offerings better. Soon, they'll realize it's the staged experiences that are most saleable and abandon the practice of charging exclusively for goods and services.

Can you give an example of this?

Nike created the NikeTown chain of stores with the goal of building its brand and supporting sales of Nike products in other general retail outlets. NikeTowns are rich in such experiential elements as exhibits that chronicle the evolution of the company's shoe design, a usable half-court basketball floor, and dramatic video clips of star athletes like Michael Jordan and Tiger Woods. But Nike doesn't extract a dime from anyone who wants to enter their store. As is, NikeTown is a prop to drive the sales of sneakers and sweatshirts. We believe that if NikeTown were to charge admission, the company would then be forced to stage more compelling events inside — creating the kinds of experiences that guests would gladly pay a premium for and that would keep them coming back again and again. For example, guests could go one-on-one with NBA stars on that now idle half-court and receive a customized Nike t-shirt to commemorate the date and score of the game. There might be interactive kiosks for educational and entertaining exploration of past athletic triumphs. Virtual reality machines could let visitors really "be" Tiger Woods. We're convinced that Nike could generate as much admission-based revenue per hour at NikeTown as Disney does at its amusement venues if they committed to a strategy aimed at competing in the experience economy.

Explain what you mean when you say "you are what you charge for"...

Ultimately, a business is defined by what it sells. You're not truly selling a particular economic offering unless you explicitly ask your customers to pay for that exact offering. For experiences, that means charging an admission fee. We break it down this way: If you charge for "stuff," you're in the commodity business. If you charge for tangible things, you are in the goods business. If you charge for the activities you execute, you are in the service business. If you charge for the time customers spend with you, then — and only then — are you in the experience business. The truth is, you can design the most engaging experience around your service offering or within your retail establishment, but if you don't charge people just for entering your place — as do concert halls, theme parks, motion-based attractions, and other experience venues — you're not truly selling an experience.

It's compelling — but hard to believe — that people would actually pay an admission fee to shop at their local mall. Yet you say they will...

Actually, they already do. The $7 parking fee at Universal CityWalk in Los Angeles is actually an admission fee, paid in advance, by everyone who enters the mall. Further, the history of economic progress consists of charging a fee for what was once free. For example, do you think that forty years ago that people would have believed that in the near future the typical family would routinely pay someone else to change the oil in their car or bake the kids' birthday cakes? No doubt they'd have thought you were crazy. In the full-fledged experience economy — and remember we are only just embarking on it — we will increasingly pay companies to stage experiences for us. We will do this just as we now pay companies for services we used to perform ourselves, goods we once made ourselves, and commodities we once grew and extracted ourselves. To sustain the model, business must learn how to stage revolving productions that change and reveal new value over time in order to justify charging admission again and again.

You mentioned theme restaurants as places that stage experiences. Why then, have restaurants like Planet Hollywood failed to retain customers?

We think there are several reasons for this. For one, theme-based restaurants like Planet Hollywood generally try to recover all the costs of staging their experiences through premium priced food and memorabilia (t-shirts and the like). So visitors have gotten used to getting the experience for free, and after the novelty wears off, view the food as grossly overpriced. So why go back? Sales are plummeting at these kinds of venues because the business fails to refresh the experience. Repeat guests see or do little different from what they saw and did on previous visits. And how many t-shirts with the same logo can you own? Companies that fail to provide consistently engaging experiences overprice their offerings relative to the value received. Or they find their experience commoditized as competitors replicate the business model and undercut them on price. To truly enter the experience business, Planet Hollywood should charge admission to its venues, and use that income to offset the cost of constantly upgrading and changing the experiences they provide guests, and allowing them to lower their food prices to more reasonable levels.

It is easier to imagine retailers or restaurants moving into the experience business, since they have physical venues that can serve as obvious "stages" for customers. But what about companies in the manufacturing industry?

What manufacturers must do is focus on the experience customers have while using their goods, rather than on how the good or product itself performs. They must explicitly design their goods to enhance the user's experience: so automakers focus on the driving experience; furniture makers on the sitting experience, book publishers on the reading experience. We call this "inging your things," essentially experientializing your goods. For example The Rawlings Sporting Goods Company, exclusive baseball manufacturer to the Major Leagues, introduced a ball that makes play-catching more engaging. This "radar ball" has a microchip that digitally displays how fast the ball has been thrown after each toss — and it sells for around $30 (more than six times the cost of the average baseball). Using an experience-focused mindset, manufacturers can surround their goods with services that add value to the activity of using them (the radar makes it affordable to know a kid's velocity), and then perhaps surround those services with experiences that make using them more memorable (the new social interaction between the two people playing catch, as in "Hey Dad, how fast was that one?").

You say that people often confuse experiences with entertainment. Why is that a mistake?

It's easy to see why people often equate the two — so many examples of staged experiences come from what the popular press loosely calls the entertainment industry. But businesses that assume that entering the experience economy means simply adding entertainment to their existing offerings are setting themselves up to fail. They must remember that staging experiences is not about entertaining customers — it's about engaging them, connecting with them in a personal, memorable way. While entertainment is passively absorbed through the senses — as generally occurs when viewing a performance, listening to music, or reading for pleasure — truly rich experiences encompass four realms, of which entertainment is only a part. The other realms include education, escapist, and esthetic — all of which involve the immersion or active participation of the individual in the experience.

What do you mean by "work is theatre?" Is this really a viable operating model for business?

Equating work with theatre is not a metaphor, but a model for doing. The word "drama" is derived from a Greek word meaning simply "to do." Managers need to recognize that in all companies, all the time, employees are playing — not in a game but in what should be a well-conceived, correctly cast, and convincingly portrayed real-life drama of doing. Understanding this crucial point brings whole new meanings to common business terms borrowed from or shared with the performing arts: production, performance, method, role, scenario, and a host of others. By thinking of work as theatre, a business opens itself to opportunities to distinguish itself from humdrum competitors who perform work without recognizing the true nature of their acts. So managers learn techniques for mass customizing presentations from street theatre; HR departments learn to conduct real auditions, not run-of-the-mill interviews; executives learn from real acting coaches how to improve their public speaking.

With theatre furnishing the operating model, even the most mundane of tasks can engage customers in a memorable way — because employees understand that any work observed directly by a customer must be recognized as an act of theatre. Consider the Ritz Carlton bellman who warmly welcomes guests back by name — accomplished by reviewing a daily printout of expected new guests and their distinguishing traits. Or the hostess at the Rainforest Café who ditches the dull phrase "Your table is ready" with the stage-setting "Your adventure is about to begin!" Or the FedEx employee who deliberately rushes about to convey the impression of speed as the essence of the company. In the experience economy, businesses must figure out how to make work, whether performed on stage or off, more engaging.

You say the easiest way to turn a service into an experience is to provide poor service — creating a decidedly unpleasant experience. What will companies in the experience economy do to make sure they provide positive experiences for customers?

Businesses that wish to enter the experience economy should first get their act together by customizing their goods and services. Companies like General Nutrition Center (GNC) mass customize their offerings — meaning they efficiently serve customers uniquely by attaining individual customization at the lowest possible cost. Doing this requires that a company modularize their goods and services so that they can be immediately combined and recombined on demand to suit individual customer wants and needs. GNC's Live Well initiative customizes orders for vitamins, shampoos, conditioners, lotions, and other merchandise — tailored exactly to a specific customer's requests. This is key, since businesses need to recognize that customers no longer want choice — they just want exactly what they want.

What do you mean by "customer sacrifice?"

Customer sacrifice is the gap between what a customer settles for and what the customer wants exactly. British Airways is working on tracking individual customer preferences not just for beverages but for meals, magazines, and other amenities. Once they collect this information, they'll use new software to download the individual preferences of the high-value customers it tracks to provide each with only the precise onboard services he desires. Sound expensive? Wrong — British Airways will actually save $5-8 million a year and pay back its initial investment in the first year by eliminating the waste of both loading and carrying unused beverages, meals, and other items onto the airplane. And that's before the company even starts to realize the individualized experience benefits. In similar fashion, a rapidly expanding array of interactive technologies from E-mail to pagers to electronic kiosks and the World Wide Web is enabling companies to better learn the specific wants of potentially millions of individual customers. The successful companies of the experience economy will strive to reduce customer sacrifice as much as possible not by simply learning about their customers, but by cultivating learning relationships. They'll do this by the combination of mass customization in operations with "one-to-one marketing" to form the basis of a learning curve that grows, deepens, and becomes smarter over time. The more a customer "teaches" the company, the better it can provide just what he wants — and the more difficult it will be for competitors (whom the customer would have to teach his preferences to all over again) to lure him away.

How can companies get started in actually staging experiences for customers?

The first and most important step in creating experiences is envisioning a well-defined theme, which forms the foundation of the experience. "The Geek Squad" serves as a powerfully simple and appropriately nerdy theme for a computer repair firm; "The Sargent's Program" provides a perfect theme for the Washington, D.C.-based fitness program modeled after a boot camp. Second, the experience must be rendered with indelible impressions — the "takeaways" of the experience. The owner of Barista Brava, a chain of coffee bars in Washington, D.C., motivates employees to remember faces so they can presciently hand regular customers their "usual" order before being asked. Third, experience stagers must eliminate negative cues, which are essentially anything that diminishes, contradicts, or distracts attention from the theme. Disney theme-park cast members never, ever step out of character while "on-stage." Only in areas prohibited to customers can they "be themselves." Fourth, mix in memorabilia, offering momentos that extend the life of the experience. The special agents of the "Geek Squad" stage such memorable computer repair experiences that customers buy t-shirts and lapel pins with the company's logo from its Web site. Finally, the more an experience engages the senses, the more memorable it will be. The mist at the Rainforest Café appeals to all five senses, making it impossible for guests to be unaffected by this simple cue. While it's still too early for hard and fast rules for the experience economy, pioneers in every corner of business and beyond — from restaurants and retail stores to classrooms and even parking garages — are already scripting and staging unique experiences, creating more and more valuable offerings for customers.

Should experiences be considered the ultimate economic offering?

No — there is actually a fifth, and final offering that comes when customers are guided to achieve some specific aspiration. We call these offerings transformations. Just as the lower-value offerings of goods and services are being commoditized, with companies shifting to experiences to differentiate themselves — experiences too will become commoditized over time. There are many industries that already focus on helping people transform themselves, from the fitness industry to organized religion. But whereas a gym might provide an experience by doing things like bringing in celebrity trainers and constantly upgrading their equipment according to members' needs — transformation would entail actually ensuring that an individual customer attained a specific goal, such as losing 20 pounds by a given date. As we've said — you are what you charge for — so companies that make it into the transformation business will be those that charge only for the designated outcome a given customer achieves. In the transformation business, the customer is the product — and it is going to take a big shift in the current business mindset to get to this level. But the companies who do will capture both customers' hearts — and dollars.

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